No matter what industry your organisation operates in, strategic cash flow management is likely to be one of your most integral business functions.
In particular, making sure your company brings in the necessary funds to sustain ongoing operations is key to meeting organisational goals and objectives. Without money coming in, how can your business expect to grow and thrive?
The term cash flow refers to the way money moves into and out of your organisation. Effective cash flow management policies will ensure that your incoming payments are regular, reliable and more valuable than your outgoings.
Unfortunately, cash flow missteps can cause big problems for small businesses, as these organisations do not generally have the capital to recover from a loss of income or an unexpected expense.
Having an unstable cash flow can make it more difficult to create plans for the future. Without a good idea of what income and expendables will be like one month or even one year down the track, can make it challenging to enact strategic business decisions.
Even the most experienced and business-savvy company leaders can make mistakes in cash flow management. To help protect your enterprise’s revenue, here are four of the most common income errors and how to avoid them.
1. Not having a safety net
While most small businesses operate on micro-budgets, it helps to have some capital locked away for emergencies. If an unforeseen event was to interrupt your operations, would be able to meet billing demands without your regular income?
Failing to maintain a healthy safety net – whether by taking out business insurance or saving funds in a separate bank account – can mean that when disaster strikes, your company has to shut down for good.
It’s important that if a large, unexpected expense comes up, you do not have to resort to using your personal finances or a credit card to fill the gap.
2. Paying vendors too early
While it is important to foster a good relationship with your vendors, paying your invoices early can lead to cash flow management problems.
In particular, if your own clients are waiting until the end of the invoice period to complete their payments, you could be left with a negative balance between your outgoings and incomings.
However, rather than delaying your vendor payments and potentially losing out on early payment discounts, you could instead consider ways to promote faster invoice completion from your clients.
For instance, direct debit software is an effective solution which enables you to access reliable and recurring revenue, and provides clients with an easy payment option.
3. Having a disorganised accounts receivable system
When your accounts receivable system is not properly monitored or organised, you could find payment periods are unpredictable, leading to serious cash flow management problems.
You should therefore consider automating your accounts receivables process, essentially providing you with automated payment collection. This will mean your business follows a clear process for fee collection to ensure clients are informed and prepared for invoices and bills.
4. Not measuring expenses correctly
When considering your cash flow management, it is vital that you give equal weight to your income and expenses.
The outgoings are just as important as your income – and making incorrect assumptions can lead to your company rapidly losing money and falling into debt. Ensure you are using trusted tools to forecast expenses, as well as sticking to a reliable budget.
Additionally, it is important that you don’t take on too many unnecessary expenses, such as hiring more staff than you need or outsourcing services you are qualified to take care of in-house.Cash flow management is a crucial business consideration. While there are many potential pitfalls in this process, simple policies and software investments could be the key to maintaining positive revenue streams.