3 Biggest Cash Flow Mistakes Small Business Owners Make
Two key traits of most small business owners are an abundance of passion and optimism about the future. With all the bad news that bombards us on a daily basis, it’s refreshing that so many people want to beat the odds and set out on their own.
But passion and optimism don’t grow a business. Cash flow is key to having a thriving business that can give you the life you love. And that’s where many small business owners fall short.
Not using proper cash flow management strategies can kill your business fast. Here are three common cash flow mistakes most small business owners make.
Mistake #1 – Not Using A Cash Flow Budget
Your eyes may glaze over and your stomach may churn at the thought of having to deal with a cash flow budget, but trust me on this one, it really will help you sleep better at night. And once you have it set up, it will take minimal effort to maintain.
A cash flow budget is a great planning tool that can help you with your sales and marketing along with giving you plenty of advance notice of any cash flow shortage issues on the horizon.
It’s simple to set up. You can start with this free Cash Flow Budget Template. Here’s what you need to do to set up your baseline budget:
- Collect the historical information on last year’s sales. Plug those numbers into the Sales section.
- Collect the historical information on last year’s expenses. Plug those number into the Expenses section.
- Make any adjustments to the budget numbers based on current plans for the coming year.
- Pay close attention to the Cash Flow Surplus / Deficit line. Watch for red flags that indicate you’re headed for a cash flow problem.
When your budget is complete, don’t stick it in a drawer to collect dust. To get the most out of your budget, you need to monitor it on a regular basis – a quick weekly check in will do – and update it with actuals monthly. Use it to inform your actions about marketing your products or services and how you operate your business.
Mistake #2 – Being Overly Optimistic About Sales
We all have high hopes that our products or services will sell like hot cakes. But sometimes things just fall flat. Hearing nothing but a bunch of crickets when you’ve launched something new is one of the worst feelings in the world.
The key to your success is to make sure you’ve clearly defined your target market so you know what they want to buy.
Do your research before you launch by reaching out to your target market to ensure you have a clear understanding of what will appeal to them and get their idea of a fair price point. This can be accomplished with a simple survey.
Use the survey data to help determine your sales forecast. But one point to keep in mind – people often say they will do something and then don’t actually do it, so adjust your numbers accordingly.
Create your sales forecast using your logic, not your heart. It will be much more realistic.
Mistake #3 – Not Having A Cash Flow Cushion
There’s nothing worse than having an unexpected expense pop up with no way to pay it. And there’s one thing that’s a given in business – those expenses will happen, so you need to be prepared.
On the Cash Flow Budget worksheet you’ll notice a row labeled Minimum Cash Target. It’s a really good idea to enter a number in this field for every month of the year.
You’ll enter an amount equal to what you think is the minimum amount of cash you want to keep on hand in your business for emergency situations. A good rule of thumb here is an amount equal to three to six months of expenses.
Adjust your sales promotions and expenses where possible to ensure you always have that cushion available in your business.
The Bottom Line
Using good cash management practices along with monitoring how your cash is flowing, both now and in the future, is the path to a sustainable business. Start today and you’ll be well equipped to realize your dreams.
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