According to the U.S. Bureau of Labor Statistics, 20% of new businesses fail during the first two years of operation – and 45% fail during their first five years. Those numbers are similar for businesses in other countries around the world, including South Africa.
Several things can lead to the success or failure of a small business, many of which you don’t have control over. What you do have control over, however, is how you manage your business’s cash. Effective cash management can help you withstand poor market and economic conditions. Poor cash management can ruin even your biggest market success. (Almost two-thirds of failed small and medium-sized businesses cite cash flow as a factor.)
So what can you do to ensure that you’re properly managing your business’s cash? The first thing is to learn from the errors made by others. In this article, we look at some of the biggest cash management mistakes made by small businesses.
1. Not Properly Monitoring Cash Flow
Perhaps the most common mistake made by small businesses is not properly monitoring and managing cash flow. If you don't keep detailed records of the cash coming in and going out of your business, you don’t have a good sense of your company’s financial health. You need to always know the state of your business’s cash flow and be aware of any trends or changes that affect that cash flow. This means staying on top of sales and expenses, as well as the balance in your bank account. You don’t want to have any cash-related surprises.
2. Paying Bills Early
You don’t need to and shouldn’t pay your bills before they’re due. Why let someone else use your money when you could be using it – even if it’s just for a few days? Hold onto your cash until the invoice is due unless a vendor offers an early payment discount. It’s your money, so keep it in your hands for as long as you can.
3. Paying Bills Late
Just as you shouldn’t pay your bills early, you also shouldn’t be late. Paying after the due date can result in unnecessary late fees and ding your credit rating. Don’t miss a payment unless you absolutely don’t have the available cash on hand – and then, try to work something out with the vendor.
4. Making Mistakes
Believe it or not, people – and businesses – make mistakes. It’s not uncommon to make simple mistakes like paying the same bill twice, miscounting cash on hand, or writing a check for the wrong amount. Unfortunately, every little mistake adds up. If you’re properly tracking your cash flow, however, you can catch errors as soon as they occur and rectify them, if need be. You can also alleviate many manual errors by using a secure cash deposit machine that closely monitors cash inflow and outflow.
5. Extending Credit Without Proper Checks
Your business’s cash flow can be adversely affected when your customers don’t pay on time – or at all. Before you extend credit to new customers, make sure you do a proper credit check and ask for the appropriate references. A few quick calls can tell you whether a given business is a good credit risk or a bad one.
6. Not Properly Managing Accounts Receivable
Even the best customers sometimes get behind. When that happens, you need to remind them that their payments are overdue. That requires staying on top of your accounts receivable, so you know who’s late and how much you’re owed. It also requires managing your end by sending out invoices in a timely fashion and following up with overdue notices when necessary. Outstanding receivables can lead to big cash flow problems on your end, if not properly managed.
7. Using Business Cash for Personal Expenses
It’s never a good idea to borrow money from your business to cover your personal expenses. Even if your company is a sole proprietorship, you need to keep your personal expenses separate from your business expenses. Mixing your personal and business finances can only lead to trouble.
8. Confusing Profit with Cash Flow
Many businesspeople confuse profit with cash flow, but they’re really quite different. Profit is your sales minus your expenses. Cash flow is literally how much cash moves in and out of your business. They’re not the same thing.
Your business can show a profit on paper yet still not have enough cash on hand. You can also show a positive cash flow while running your business at a loss. You need to track profits and cash flow separately and make decisions that enhance both.
9. Not Building a Cash Reserve
Because both sales and cash flow can ebb and flow over time, you need to build up a cash reserve you can draw from during slow periods. Think of it as an emergency fund for your business, just in case you need it. When business slows down, you can draw from your cash reserve to pay your bills and keep your business solvent. When business picks up, divert some of your profits back into your cash reserve fund. If you don’t build an adequate cash reserve, you may be caught shorthanded during slow periods.
10. Not Having a Cash Management Strategy
To prevent cash management mistakes, you need to have a detailed cash management strategy. This strategy starts with building an expense budget and then staying within that budget. You need to plan for when cash comes into your business, on a monthly or weekly basis, as well as when cash flows out of your business, in the form of buying inventory and paying bills. Your cash management strategy should also include plans for a cash reserve and the use of technology-based cash management solutions.
Let Deposita’s Secure Cash Management Solutions Help Prevent Mistakes in Your Business
When you want to prevent cash management mistakes, turn to the experts at Deposita. Our secure cash management solutions are designed to help businesses like yours better manage cash flow and make fewer mistakes. We’ve been providing cash management solutions to businesses for more than a decade – we can help your business improve its cash management.
Book a free consultation today to learn how Deposita’s secure cash management solutions can be tailored to suit your business.