Business owners are often overloaded with head-scratching activities and are left with no time to manage their cash flow, which may lead to business collapse.
Although you may have great ideas and your business is doing great from the very start, about 80% of all businesses small and large fail because of improper cash flow handling. The culprits are often hidden costs that are tough to manage and often cripple a business.
It’s vital to manage your cash flow keenly so that you grow and prosper. Here we explore some common cash flow mistakes business owners make and how to avoid them.
1. Forced growth.
Having a great growth story may be appealing, but forcing growth too much may be the death of the business. Imagine experimenting with Facebook Ads and having good ROI the first month. The second month, you spend five times that and expect five times the sales. Instead of that, you have just spent more than you earned that month and have to take out a loan to cover your expenses. It’s just one example of getting too far ahead of yourself and excessively forcing growth.
Effort-oriented tasks such as more money for staff, a bigger office, new products, and higher-than-needed ad spend require being handled rapidly, as losing too much cash may harshly influence your daily operations. Extended services such as these originate more revenue, and with it come cash outflows. Carefully estimating these cash outages can prepare you for future demands.
2. Excessive spend on customer acquisition.
When owning a small business, it’s important to get new customers fast, even if that means spending more than you make initially. There are two ways of measuring if you’re acquiring the cash you predicted. One of those is the cost of acquiring the customer. The other is lifetime value (LTV), which is the total profitability over the customer’s time with your company. In order to be profitable, the LTV needs to be higher than the cost of acquisition.
Excessive spend on customer acquisition may net a very small customer with very poor interest, and many small businesses have the misconception that more customers equal more revenue.
Acquisition costs come with hidden elements, such as the salary and commission of the salesperson and the marketing campaign costs. Knowing all the direct and indirect costs of customer acquisition is vital, and failing to do so will burn up your profitability without you even knowing it.
3. Inaccurately assessing your profitability.
When making sales, always consider the marketplace commission, transaction fees, shipping costs, cost of storage, and returns. More often than not, businesses fail to calculate their profitability when entering into a deal, which may lead to difficult cash problems due to committing too much on overheads.
Sometimes healthy and wealthy companies forget this simple fact when buying or renting space or treat it as trivial. Accurately anticipating these costs is vital for the health of the company. Profits only come from excess money after all the expenses have been covered.
4. Seasonal effects that affect.
Some businesses that do not operate all year long may find they are cash-rich during its peak seasons and managing cash gaps during its off season.
Cash-rich seasons bring overheard commitments that are challenging to manage through off-seasons. What’s more, these off-seasons can often lead to drops in price just to sustain a level of sales. Secure enough provisions for off-seasons in your financial plan and enjoy a healthy year-long business.
Keep in mind these four cash flow mistakes and give your business a greater chance of success.
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Universal Funding is a private funding source that has funded thousands of businesses and more than $2 billion since 1998. We turn your accounts receivable into the funding you need through invoice factoring and can have capital in your hands in a matter of days.