Working with small businesses for the last 20 years has brought with it some exciting experiences. One of the most common experiences is the cash flow management mistakes that business owners make. You might think that only the inexperienced business owner has these near-death experiences with their companies. Still, I have worked with some very experienced, very savvy business owners who have made these very same mistakes.
The mistakes we make with our cash flow, both in business and in our personal lives, have more to do with how we FEEL about money than they do about how we THINK about money. Don’t cringe – just keep reading! You’ll start to smile and nod because I’m sure you’ve made at least one of these mistakes already, no matter how logical and comfortable you think you are about money.
Mistake #1 – Impulse spending
Impulse spending shows itself in many forms. That networking event that you’re sponsoring, the last-minute table you took at the trade show, or the computer you just bought for the office. These three items seem like things you need to purchase in the ordinary course of business, right?
For the most part, they are but let’s look at the computer purchase. You’re asking me how a computer is an impulse buy, you need it to run your business, and the old one just crashed. Yup, this exact sentence is WHY it’s an impulse buy. Any mission-critical equipment for your business should have a replacement budget and plan in place.
Mistake #2 – Paying your bills based on the bank balance
This one is, by far, my favorite mistake and probably the most common among businesses struggling with cash flow. This one is also closely tied to impulse spending. Typically what is happening here is the squeakiest wheel gets the check. You have someone demanding payment. Instead of having a confrontation by saying, “No, I can’t cut a check today, but I can get you a check on Thursday” for example, you logon to your online banking and see that you have some money in the account, and then you write the check.
It is more damaging than not paying the vendor that day. You have just taught the person on the other end that you are willing to put their needs before your own business’ needs. Use your imagination of how damaging this can be in the bigger picture of your relationship.
Mistake #3 – Extending credit to customers that aren’t creditworthy
When deciding to extend credit to your customers, you are loaning money to your customers. Have your customers complete a credit application and include trade references and bank references. Call those references to find out how much they have had outstanding credit with the vendors. It is essential to know how much credit they are looking to receive from you and if they have had similar amounts of credit in the past in good standing. If you are selling a high ticket item, don’t be afraid to ask for financial statements.
Mistake #4 – Allowing your accounts receivables to age
You’ve extended credit to your customers, and now you need to collect on the invoices. You have a lot of reasons for not collecting the money that’s due. You are busy, you don’t want to be a pest, or you don’t want to jeopardize that next big deal pending with your customer. All of these reasons, or should I say excuses, are all great ways to mismanage your cash.
Staying current with your collections is as critical as shipping your products on time. Allowing your customers to pay you late is teaching them it’s not essential you get paid on time. Make sure to have a consistent system in place to collect payments from your customers and help them keep current with you.
Mistake #5 – Paying your vendors too early
You intend to foster good relationships with your vendors; however, the only time to pay vendors early is when you are receiving a discount for that early payment. Even then, you need to weigh the pros and cons of whether or not the deduction is worth giving up your cash sooner than you need to. Maintaining a consistent cash balance while paying your bills on time will have long term benefits to your company, mainly as you are growing your business.
Mistake #6 – Stocking up on inventory and supplies
Incremental savings on bulk orders lose their value when inventory sits on the shelf, and cash is no longer available for other endeavors. In other words, you think you are saving on your per piece price and increasing your gross profits. However, you have tied up cash and can no longer act as quickly on other opportunities.
You need to weigh whether the small savings from buying in bulk are worth the amount of time the inventory sits on the shelf. The inventory doesn’t earn interest; it generally only loses value over time.
Mistake #7 – Not controlling payroll costs
It is effortless to allow the days to grow longer and longer, and slowly the payroll creeps up. Ways that payroll costs increase include lack of planning and lack of direction. How long does it take to refocus your team each time a new fire breaks out?
A customer call about a late order where everyone rallies to make the customer happy is much more costly than planning out a work schedule and sticking to it. Setting standards and having a “rule of thumb” for how long a task should take will help keep payroll costs consistent.
Are you still nodding your head knowingly because you’ve made some of these mistakes yourself? Have you made other mistakes that I haven’t covered here?