6 Mistakes for Business Owners to Avoid in Cash Flow Management

Being a business owner and running a profitable business is a constant challenge. A business owner tends to wear many hats at once. They often oversee client relationships and have a hand in human resources, operations and sales. This is often the case, even if he or she is surrounded by a great team.

Keeping across your business financial numbers is another crucial business activity. This is particularly the case for monthly cash flow forecasting and management. This discipline can be the difference between having a thriving and growing business, or becoming another failed business statistic.

These are the most common mistakes we see regularly when it comes to cash flow management for small business.

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1. Lacking credit control discipline and procedures

Late invoice payments are a huge problem for Australian small businesses. The Australian Small Business and Family Enterprise Ombudsman has found that Australian invoice payment times were amongst the worst in the world. In Australia invoices are paid on average 26.4 days late.

This gap in when funds fall due and when they are actually paid has a huge impact on small and medium businesses. They often miss out on opportunities for growth due to lack of available funds. Or, they face reduced profit because they have resorted to expensive loans or overdrafts to cover the cash flow shortfall.

Ensuring you are using modern accounting systems can help you manage your accounts receivable efficiently. Most systems tell you exactly when invoices are due. Often they have the ability to easily send a follow up. Having a team member that can relentlessly chase up overdue invoices whilst maintaining good client relationships can help.

2. Insufficient contingency funding

We see this often when a business has boot strapped their own organic growth, but neglected to put funds away for a rainy day.

A cash reserve or contingency funds can help meet payroll, rent or pay suppliers in times when cash flow shortages occur. It can also mean you have access to funds to make the most of a great growth opportunity.

As a general rule, consider putting aside between 3-6 months of company expenses in to a contingency account.

3. Lacking discipline around cash flow forecasting

Making use of a cash flow statement means that you will know when your business is about to face a cash flow shortfall. Facing a shortfall doesn’t mean you are in financial trouble, it can often just be a timing issue.

There are a number of options you can consider when you are facing a cash flow shortage including invoice finance.

4. Overestimating future sales

In some cases historical performance is not necessarily an indicator of future sales. There are other things to consider such as:

  • The state of the economy including interest rates and the Australian dollar

  • Whether your business is a start-up, growing or consolidating

  • The state of your industry and your competitors

5. Not invoicing in a timely manner

Once your product or service has been delivered, get that invoice out there to your client. The quicker they get it, the quicker they can pay it.

6. Overspending

It can be tempting when things are looking good in your profit and loss accounts to overspend. You might subscribe to an expensive software service that your team don’t ever quite make the most of. Or, you might bring in expensive resources to help manage business administration when you could have outsourced this.

Avoiding overspending will help reduce cash flow shortfalls when company invoices are paid late or an unexpected expense occurs.

Being able to accurately predict and manage cash flow shortages is a skill required for any business owner. Occasional cash flow shortages are part of doing business. This is particularly relevant in Australia due to average invoice payment times.

At Invoice Money we are proud to offer debtor finance solutions to Australian small businesses. We offer a quick and straight forward solution that helps them meet their supplier, wage and rent payment obligations. If you want to find out whether invoice finance can help solve your next cash flow shortage reach out to our team to discuss your requirements.

Invoice Money is the Invoice Finance provider of choice for SME’s. You can contact our team in Melbourne or Sydney here.

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