#1 Finance Mistake Small Businesses Make

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Man flipping through cash

Cash is what you can actually hold in your hands (if needed), not just what shows on paper.

When it comes to finances and money, in my opinion, the #1 mistake small businesses make  is as follows:

Small businesses confuse profits with cash flow.

Unfortunately, companies can be profitable yet run out of cash. I’ve seen this happen repeatedly. Lack of cash flow forecasting, no customer deposits or prepays, and a mismatch between receivables and payables all contribute to the cash flow issue. By this mismatch I’m referring to account receivables paid within 30-60 days but payables paid within 10-15 days, or a similar scenario .

 An example

Here is example to help illustrate what I mean: ABC Company begins work on a project on February 1 and pays out $2,500 in direct expenses and $6,000 in payroll on February 15 and again on February 28. Consequently, ABC Company has net flow of -$8,500 in cash as of February 15, increasing to -$17,000 by February 28. On March 1, the company bills the customer for $25,000 and allows 30 days for the customer to pay. The customer pays on March 30 which brings the net cash flow to +$8,000. The gross profit on the project is also $8,000. However, for 45 days, the company had a cash deficit of $8,500 or $17,000. Where did the funds come from to cover this gap?

 

Often small businesses cover these gaps with new and ongoing business. The business convert older receivables to cover new cash gaps. This is why many businesses do not recognize cash flow issues until business slows. When business slows, the cash flow causes major issues and the cash crunch hits hard and fast.

Cash Flow Tracking

Business owners can reduce or prevent cash flow problems by using a cash flow statement to track the company’s cash inflows and outflows. Business owners and managers should review these cash flow statements on a weekly or monthly basis and make the necessary billing and payment process adjustments.

Do you have similar issues with cash flow? Have you had them in the past? Please share your experiences.

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