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.
In the early days of your company, expect to be in the negative cash flow. This happens when your outflow of cash is greater than the cash incoming. Eventually, you want to get your small business into the positive cash flow, when the cash entering your business from sales, accounts, etc. is more than the amount of money your business is paying out to accounts payable, expenses and salaries.
Making smart financial decisions early-on is key to getting your business to a positive cash-flow point. We’ve identified some of the common cash flow mistakes small business owners make when they’re just starting up.
5 Mistakes That Could Slow
Small Business Cash Flow
1. Lack of Initial Cash
Obviously, working capital is a must-have for new business owners. Just like opening your doors won’t make customers appear, profits aren’t instantaneous.
List all the things you’re going to have to buy or bills you’re going to have to pay to get your small business off the ground – installation or starting fees for certain services, your first batch of product, furniture or software, etc.
Then, once that’s all done, you’re going to need to account for the next six months. Do you have enough money left after all those expenses to continue operating? If not, you need to rethink parts of your financial plan.
As a rule of thumb, always try to have double the amount of capital you think you’ll need to stay in business. 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 and staff. It’s human nature to desire the latest and 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 and upgrade as your profits grow.
If your small business is goods based, make sure to monitor your inventory. Knowing what you have and what you need will help you manage your cash flow and prevent your company from over-purchasing items. Some might say, “we’ll use the product eventually.” But in the meantime, your company wasted money buying something it doesn’t need. Money is tight, especially in the beginning stages of running a small business. Every bit counts.
Another simple way to manage your small business’ cash flow is by opening a separate bank account for your company and its expenses. This makes it much easier to track how much money you’re spending, what you’re spending it on and how much you’re saving.
One of the easiest ways to keep track of your overall spending is by keeping track of how much you’re making and spending in a book. Each day, week and month, write down how much money came in and how much went out. By physically keeping track of your expenses, you can better catch opportunities to save money.
3. Failure to Set Realistic Goals
If your small business wants to be successful, you’re going to need to manage your influx of money and set realistic goals. Avoid the cash flow mistake of expecting profits and success within the first year or so of opening your doors.
One of the first things new business owners should do is prepare a break-even analysis. This 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 and 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 money 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 on. This should give you a good understanding of your working capital health over the next month or so. Use this to estimate the number 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. Understand who your customers are. The best way to do that is by crafting an ideal customer profile or two.
An ideal customer profile is a fake persona your company crafts, based on facts, that helps your business identify their wants and needs. Making customer profiles allows your company to better market to your ideal market.
If you aren’t sure how to start your customer profile, don’t worry. Start with this ideal profile outline and add any other questions or information you think would be beneficial to have.
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. 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.
If your company isn’t sure how to go about collecting payments or your account receivables, factoring can help you. In addition to providing your small business a cash advance, the factor takes on billing and collecting responsibilities so you can focus on growing your small business. With the extra capital, you can invest in payroll funding for small business, taking on new projects or whatever your company sees fit to increase profitability.