Overnight success? Don’t count on it. Starting a new business takes time… and plenty of cash flow. Working capital is required long before your doors open for business. And, once you’re finally up and running, expect to churn through funding before you come close to making a profit. Making smart financial decisions early-on is key to a thriving business. We’ve identified some of the common cash-flow depleting mistakes small business owners make when they’re just starting up.
5 Mistakes That Could Cripple Small Business Cash Flow
1. Lack of Initial Cash
Obviously, cash is a must-have for new business owners. Just like opening your doors won’t make customers appear, profits aren’t instantaneous. After shelling out funds to get your business off the ground, you’ll need enough cash flow to cover operating costs for at least six months. Many business owners underestimate their cash flow needs, so it’s recommended to have double the amount of capital you think you’ll need to stay in business.
2. Spending Too Much, Too Soon
Small business owners need facilities, technology, equipment, furniture & staff. It’s human nature to desire the latest & greatest to impress your clients and peers. Just remember that luxury office chairs and cutting-edge technology won’t save your business if hard financial times hit. Stay practical – the reason you started your new business was to generate profits, not because you wanted to purchase pricey office decor. Don’t add any more debt than necessary. Start with the basic essentials (buying used is a financially-savvy move) and upgrade as your profits grow.
3. Failure to Set Realistic Goals
Set realistic projections for yearly sales and business profitability. First, new business owners should prepare a break-even analysis, which illustrates how much profit is necessary to cover your business costs. To maintain the health of your business, regular reporting (at very minimum) should also include a profit & loss report, balance sheet, and an analysis of your sales and customer base. Here are some free financial planning templates to make your business financial reporting a cinch.
To know if your business will find success or strife in the future, you’ll want to generate these two reports on a monthly basis:
Cash Flow Forecast: Plan ahead for cash flow. Do you have enough cash for future operating expenses? Easy to use cash flow prediction documents are available to help business owners monitor what’s going in and out of your business.
Sales Forecast: Keep an updated tally that highlights your sales that have yet to be billed for, as well as prospective sales you’ve been working. This should give you a good understanding of your working capital health over the next month or so. Use this to estimate the amount of monthly sales your business can expect moving forward.
4. Ignoring Customer Demographics
Attracting new customers is critical and will prove tough if you don’t understand who to target. Who are your customers, really? What is their income bracket? Where are they located? How can they best be reached? How are they finding out about your company? What devices are prospects using to reach your website – mobile, tablet or desktop? Is there a high demand from a particular industry? Assess your data to compile a customer profile. Knowing your audience will drastically improve your marketing ROI and help predict demand for your products and/or services.
5. Neglecting Accounts Receivable
Consistent review of accounts receivable will keep your cash flow steady. If payments are falling behind, immediate steps should be taken to speed up the collection process. Be relentless, your livelihood is at stake if customers hold off paying you. If slow-paying customers drain your working capital, factoring accounts receivable is often a smart solution to access the capital that’s tied up in receivables.