The Worst Cash Flow Mistakes That Small Business Owners Make

Cash flow is the most important element of any small business.  It does not matter how great your product
or service is, how profitable your operations are or how many people want to support or invest in your
company.  If you cannot manage your company’s cash flow properly on an ongoing basis you will have
constant, ongoing problems and your business will probably not survive.

There have been many studies by reputable sources such as financial services companies, including some
of Canada’s largest banks indicating that more than 80% of start-up companies and small businesses fail
because of inadequate or non-existent cash-flow management.

Even the most accomplished businesspeople must pay constant attention to operating cash flow to avoid
putting stress on their company and creating the danger of going out of business.  The most common
mistakes that entrepreneurs and small businesspeople make are:

Being Too Aggressive in Forecasting Sales Volume

A strong sense of optimism is an underlying trait of all successful entrepreneurs. But while optimism is
absolutely critical for any business owner, if that optimism gets in the way of operating objectivity and
realism it can be a problem.

There are many pitfalls between looking at the size and strength of a given market and turning your efforts
in that market into realized sales and revenues.  Both external and internal influences can create a situation in which rosy projections are not met.  It is vitally important that future sales and revenue projections are created by applying well thought out and realistic projections based upon historical results and appropriate analysis

Sales and revenues projections can be very tricky during the first few years of business operations because
there is no reliable history to draw upon.  In this situation using the services of an experienced outside
consultant can be very helpful.  The arms-length insight gained from an outside source can be invaluable in
helping a business owner create a projection that makes sense and can be relied upon.
No matter how projections are created make sure they are based upon objectivity, proven facts and rational
judgment. This will save any business from having to deal with hopes that may never come true.

Not Paying Attention to Operating Costs

Some businesspeople blindly follow the old adage "It takes money to make money":  In many ways this is true but there are lot of entrepreneurs and businesspeople who do not make the distinction between spending “good” money and spending “bad” money.  Overspending can be a significant death knell for many businesses.

The reality of business spending is that while some definitely has to occur, the businessperson must
understand that not all expenses are equal…or result in the same benefit.  A lot of expenses are clearly
beneficial to a company’s operations and result in improved bottom line performance.  But there are also
many expenses that should not be made, simply because the company does not actually need to make
them.

Any businessperson wanting his/her business to be profitable must keep an eye on the bottom line,
considering the cost-benefit of every single expense.  Every dollar spent in a business is a dollar that is
ultimately taken away from profits.

Most entrepreneurs and small businesspeople, in addition to having a strong sense of optimism, have a
particular set of skills and underlying passion that led them to start their business in the first place.  This is a must but those same people should not ignore the value that outside consultants or mentors, particularly in the area of cash flow improvement, can bring to their business.  The key here is to choose wisely and
carefully and that the cost to the company is more than offset by the benefit.

Business people need to create a realistic budget (in addition to realistic projections), and stay as close to
that budget as possible. A break-even point needs to be calculated using different options, say a Best Case,
Base Case, and Worst Case scenarios, and then performance monitored regularly so that unexpected costs
or missed revenues can be taken into consideration and the break-even point recalculated.

Passive Financial Management

Cash flow for small businesses is always at risk from the non-payment of invoices by customers. If
management of outstanding accounts is not proactive a business can quickly find itself with cash flow
problems.

If a small business does not have a solid credit and collection policy in place, with the attendant penalties
for late payments the problem gets real.  If customers do not understand those late payment and collections policies they tend to take advantage and defer payment of accounts.

Communication that is critical when new accounts are set up, and action that is taken immediately when an account goes into arrears are critical to protecting the cash flow lifeblood of any small company. If clients don’t know for sure that they’ll hear the moment a payment is late, that vendor will generally drop to be the last to get paid.

Here again the use of a good arms-length consultant can be invaluable in creating credit and collection
policies that are realistic and in instituting the procedures that support those policies.  The result can be a
good, objective program that results in invaluable cash flow benefits.

Ignoring Cash Flow Budgeting

Realistic sales projections, strong expense control and good credit/collection procedures will greatly benefit the long term cash flow of any company.  However, tracking of daily, ongoing cash flow is still required to reduce the risk of day-to- day cash problems.

Seasonal businesses are particularly susceptible to day-to- day cash flow problems, given the need to build
inventories and the time period for account collection.

Using a projected cash flow analysis can help any company track revenue and expenses for any period and
given a business the ability to foresee potential cash flow tightness and act accordingly.

Here again the use of an experienced outside consultant can help the business create the cash flow
projection, allowing the company to take whatever steps are necessary (arranging longer supplier payment
terms, deferring certain expense etc.) to ensure that problems are avoided.

The cost of outside consulting resources can be considered spending “good” money for many small
businesses.  The results are improvement in both day-to- day and long-term cash flow, and the creation of
financial projections and operating policy which can be used to help guide a company on an ongoing basis.