For small business owners, you need to understand that cash is the fuel for your business, it’s the means of greater than survival.
A healthy business(Financial health) has money flowing in and out, this signifies that it is thriving. This action of money flowing is known as cash flow.
What exactly is cash flow?
Cash flow analysis, This is the heart of any business, it is the amount of money that comes and goes out of a Line of work.
Cash Inflow: The money made from sales is revenues; any profit you have made from selling your products, meaning this is your cash at hand or it can be the payment you are expecting from selling on credit. It all means the funds coming into your Line of work.
Cash Outflow: The money spent on your business, your expenses; such as the money you spend to restock, the money you spend on rent, and other expenses are your expenditure.
Overall cash-flows tells you where your business is financial, how much money your business has (Business net worth).
It’s simple, yes? But then why do small businesses still fall prey to mistakes that could quite literally ruin all their hard work. We are here to help you avoid these 3 common Cash flow management mistakes and run towards profitability in your business.
Mistake #1: Not Keeping Track
Focus on cash flow planning; You are not keeping track of consolidated data on how much money comes in and goes out of your business
Management strategies, Many small businesses hardly account for what they spend and what they gain, and that is poor financial management. As you know, cash flow budget is the money that comes in and out of your business; tracking these expenses,negative cash flow and receivables gives you an overview of financial plan where your business stands financially which helps you in making some important business decisions.
Increase cash flow, To run a successful business especially start-up, you need to have an idea of your operating activities, profit and loss statement,Total cash flow problems, incomes and expenses, profit-and-loss, how to manage cash flow and you need to have an idea of how much income you should be able to pull in monthly, and how many expenses you need to prepare for.
Cash outflows or just expenses are that your business incurs and needs to spend money on, while cash inflows are incomes or money your business received.
How to avoid this mistake?
The first step is to get an overview of Income-statement and expenses divided into expected and planned over period of time. Cash flow planning will also make it easier for you to break down incomes and expenses into recurring and one-time payments. It is important to record Annual cash flow from and everything down. (Automating in the Kippa Accounting software or Invoicing app or cashbook is an easy way out to monitor Inventories and how much is coming in and leaving your business).
Mistake #2: You forget your debtors
Cash management, This is going to be a problem if you are unable to manage your accounts receivable aka debtors. It is normal to sell your products or service on credit, it's not compulsory to do so, you can choose to run a no credit kind of business; as I was saying you need to always collect the money the customer owes you, during the selling process you should set payment terms for customers that do not pay immediately.
This is a common cash flow mistake you should avoid. Why?
Because when your business goes unpaid for a service it renders for too long it's on the way to becoming a bad debt, the money you may not be able to collect at the time it is needed.
For example, your small business suddenly incurs an unexpected expense and you need money to pay this due; the savings you have amounted to half of the expense, and the money Iya Johnson owes you would have fully funded the expense. But because Iya Johnson has refused to pay, you had to take a loan to cover your expenses. This leaves you at a loss with the interests of the loan you have to pay, with additional expenses. So you see why this is a cash flow you have to avoid because it dey choke!
How to avoid this mistake?
Use the Kippa Bookkeeping app debts reminder frequently to prompt your debtors to pay back, you don't have your finances in the mud because a customer has refused to pay you. It’s super professional, easy to use and you get paid on time.
Mistake #3: You don't plan for those expenses wey go break bank!
The most common cash flow mistake many small businesses make is running their businesses paycheck to paycheck without forecasting the hard times they may encounter in the future. Meaning you sustain your business on whatever revenues or incomes you make without budgeting and saving. Your business is at risk if you take out all your cash without saving or reinvesting. This leaves your financial position staggering and it could lead to bankruptcy.
How to avoid this mistake?
The first step to avoiding this mistake would be creating Short-term budgets and what do you know, we have 5 tips to help you create the perfect business budget.
The key takeaway is,
if you want to actively manage your business and get positive results you should strive to transform financial goals and understand your business's Cash flow statement model. Because it gives you clarity on what happens to the cash from your business endeavors during the Financial statements management process.