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Cash Management Pitfalls: How To Keep Your Business Solventank

Finance BY Ankita Sep 09, 2023
Cash Management Pitfalls

Commencing a business is a dream come true for many people. And why not? It offers you the freedom to work on your own terms, enjoy what you do, and step into a world where change is the only constant.

However, it is not just about selling products and making profits. It’s also about managing all your resources well. And one of the most crucial resources here is MONEY.

In the most basic sense, having enough cash to pay bills, take care of your team, and promote the business is vital for your venture’s long-term success.

Surprisingly, a lot of businesses mess this up. According to Intuit, 61% of small businesses across the globe face cash flow problems. So, if you want to avoid falling into that group, keep reading.

Here, we’ll go over common money mistakes and how to steer clear of them.

Failing To Create A Budget

Failing To Create A Budget

You might be surprised to learn that many small businesses, especially those with fewer than ten employees, don’t even have a formal budget.

That’s like going on a road trip without a map. You certainly know where to go but have no practical plan for how to get there. Moreover, you could easily get lost (paying more attention to other business goals) or run out of gas (finances).

Fortunately, a budget helps you understand where your money is coming from and where it’s going. It enables you to allocate your finances more efficiently and anticipate overheads. So, make sure to create a detailed budget and stick to it. You should also track expenses, scrutinize variable costs, and regularly update your budget based on real data.

Manual Invoicing And Billing

Getting paid on time is, needless to say, crucial for your business. But sometimes, it’s not that simple. Manually sending out invoices and then waiting to get paid can take a lot longer than you’d like. This slow process can really mess up your cash flow and make it hard to pay your own bills.

To tackle these issues, think about digitalizing your entire Accounts Receivable (AR) workflow. It’ll help you get your money faster by lowering the number of days it takes to get paid, known as Days Sales Outstanding (DSO). These digital solutions also free up time, letting you and your team focus on other important tasks.

But the benefits don’t stop there. Modern invoicing and billing solutions can improve the experience for your customers, too. They make it easier for clients to pay through various methods, which means you get your money quicker. Plus, these tools offer valuable insights into your income patterns, helping you plan better for the future of your business.

Ignoring Seasonal Fluctuations

Think about shops selling Christmas decorations or beach resorts that are packed in the summer. These businesses make most of their money during the said time of the year. This is known as “seasonal fluctuations.” The money earned during this period is often higher than year-round.

If your business also experiences seasonal fluctuation, forgetting to plan for these ups and downs is likely to make you run out of cash. It’s especially true when the business is slow.

A smart way to handle this is to save extra money during busy times. This ‘safety net’ can help you pay bills and cover other costs during quieter periods. You can also adjust things like how much staff you have or how much stock you order based on how busy or slow you expect things to be.

Poorly Timed Investments

Last but not least, you want your business to grow. That often means buying new things like better equipment, hiring more people, or getting a bigger place. But doing this without a good plan can actually hurt your business instead of helping it.

The reason is pretty simple, i.e., if you spend too much money when you’re not making enough, you can get stuck in a financial mess. So, what can you do?

Well, the trick is knowing when your business has enough money to afford these big purchases. Think of it like a puzzle—each investment needs to fit just right. So, before making any significant investments, look at your income statement carefully. That way, you know if you’re ready to take the next step without tripping up.

To Sum It All Up

Money matters can be tricky, but they don’t have to break your business. We’ve covered common pitfalls like poor budgeting, badly timed investments, and problems with billing. If you keep an eye on these areas, you’ll have a better chance of keeping your business alive and well. Just keep in mind that understanding your cash flow is the first step to long-term success.

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Ankita Tripathy loves to write about food and the Hallyu Wave in particular. During her free time, she enjoys looking at the sky or reading books while sipping a cup of hot coffee. Her favourite niches are food, music, lifestyle, travel, and Korean Pop music and drama.

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