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4 Cash Flow Killers to Avoid
Reading time: 5 Mins
How you manage cash flow can mean the difference between your company's success or failure. The good news is that there are universal mistakes – which means you can learn from them and avoid them.
Profit is vanity, cash flow is sanity. Cash flow is the life blood of any business. You have to spend money to make money.
We’ve all heard these clichés countless times, but the reality is that they’re clichés for a reason – they’re all true.
Cash flow is the money that you have on hand in your business. It’s not money you will have or that clients owe you – it’s actual cash in the bank that you can use to pay salaries, overheads and suppliers.
An unpaid invoice can’t be used to pay suppliers, buy more materials, pay salaries or cover overheads. Long story short, you can’t deliver your incredible product or service without enough cash in the bank to stay operational.
Here are four cash flow mistakes that can affect your business and should be avoided at all costs:
Cash flow killer 1:
When it comes to making it in a slow economy, the key is to reduce overhead costs and cap unnecessary spending:
- Review your expenditure: look at all expenses like insurance, office rental, utilities, and equipment.
- Know your costs: look through your financial statements to ensure that you pinpoint each one of your costs.
- Short-term is best: negotiate third-party contracts and try to avoid committing to high long-term overheads. This is a good idea if you work on a project or contract basis with clients – you’ll only pay suppliers when you need them, instead of carrying salaries or overheads when you don’t.
- Outsourcing: question whether it will serve you better to rent rather than buy, and to outsource rather than hire more staff.
- Don’t splurge: avoid making unnecessary, indulgent or impulsive purchases like expensive new cars, office makeovers, and fancy coffee machines.
- Budget: most importantly, create a budget – and then stick to it.
“When you’re scaling up, you want to keep costs as low as possible. When you’re innovating, don’t outsource your core knowledge and functions. On almost everything else, outsource as much as you can.”
Cash flow killer 2:
Being passive about financial management
To stay on top of the numbers and keep your cash flowing, you need to know the state of your finances:
- Track all accounts daily: who has been invoiced, who has paid and who is outstanding?
- Look at your cash flow statements: how much is in the bank; how much do you owe and where are the shortfalls or potential problems?
- Have real-time cash flow reporting: track money in and money out daily
- Invoice and collect on time, every time: don’t forget to send invoices, don’t send them late or be too shy to ask for your money.
Cash flow killer 3:
Not having a cash cushion
Cash makes your business run. That’s why you need to have an emergency fund to cover unforeseen events that could impact your survival.
- Prepare for the unexpected: your utility bill could suddenly skyrocket or an essential piece of equipment could break. Do you have enough cash on hand to cover unexpected expenses?
- Bad debts: unfortunately, sometimes clients don’t pay. Can you cover expenses if some of your invoices are late or you suffer a bad debt?
- Sales cycles take longer than expected: particularly in a tight economy, sales cycles can sometimes take longer than anticipated, but you still have bills to pay. Do you have a ‘cash runway’ that can pay your overheads while you close deals?
Cash flow killer 4:
Investing in growth before your revenue is solid
We know this is a tough one. Everything points to your growth path looking solid. You’ve got lots of clients and the orders are pouring in. You’re ready to invest in growth by hiring more staff and purchasing more equipment.
Growth is a great thing, but it’s a delicate balance that needs to be managed.
- Don’t count your revenue before it’s collected: spending cash that you don’t have in the bank is a quick way to end up in a debt spiral.
- Be cautious: deals can stall, payments can be delayed, and sometimes customers default.
- Take the lean approach: outsource what you can and keep your overheads low until your concept is proven and your revenue has materialised (aka your cash is in the bank).