Control Your Accounts Receivable for a Healthy Bottom Line
A business cannot survive without working capital. It will not matter how good your products are or how compelling your marketing is. If the company cannot manage its cash flow properly, the company will collapse. Here are 5 cash flow management mistakes you need to learn about and avoid:
1. Borrowing Irresponsibly
Borrowing money is sometimes inevitable for certain types of companies, and that’s OK. Each business has its own path to victory, and you may not find the right investors to get you there, forcing you to rely on loans. However, borrowing money can easily be done for the wrong reasons. If you are borrowing money to tide you over until something big happens, your lack of capital is a symptom that you have revenue issues. Planned correctly, your company should never need to borrow money just to keep the lights on in a normal situation.
Borrow money if you need to, but don’t stop there. Look at the company closely and see what adjustments you can make to ensure you never have to do so again.
2. Not Having a Safety Net
It does not matter how well you plan, or how good the situation looks. The winds of fortune can turn against you in a heartbeat, and you can find all your plans falling apart. That’s why you should have a safety net of capital, no matter how well the business seems to be going. It is the best piece of advice you could ever take when it comes to managing your cash flow. A reserve of capital can keep the lights on if your revenue streams take a sharp downturn, or if the market crashes. You don’t need to build your safety net over night, but you at least need to put a little into it each and every day.
3. Not Collecting Aggressively Enough
The most basic function of a business is trading goods and services to customers for money. If you cannot perform that basic function, your business will inevitably develop a cash flow problem. Some companies elect to be lenient with invoicing and let customers pay at their pace. Those companies will likely fail.
You cannot leave the core function of a business to the customer. It must be firmly under your control at all times. Give them enough time to come up with the money, but not at the cost of your company. Set terms, and have consequences in place for those who break those terms. Protect your company.
4. Undervaluing Your Offering
It can be tempting to price your product aggressively. People want to save money, and theoretically, the more affordable your offering is, the wider the market you are going to reach. There is often nothing wrong with try to cast a wider net, but many companies end up going too far. They end up with too thin a profit margin and end up with a company vulnerable to the slightest downturn.
When setting your price, there are two considerations – your brand, and your expenses. If your brand is targeted towards customers who prefer high end items, price accordingly. If your offering, sold in ideal numbers, does not cover the cost of running the business, raise your prices. It is a scary proposition as you may lose a few customers, but those are likely customers who do not truly love or believe in what you offer. That makes them an acceptable loss.
5. Mistaking All Incoming Money for Profit
One of the biggest cash flow mistakes companies make is mistaking revenue for profit. Revenue is the sum of all incoming money, and it is an attractive number. However, it only represents part of the picture. You have to account for the expenses involved in getting those sales to happen, from staff compensation to production costs. After subtracting those costs, you can get a better idea of how much money you made, i.e. your profit.
Understanding how much money you really made gives you a better idea how the company is performing and how much cash you actually have available. That knowledge will lead to better cash flow management.
The Bottom Line
Managing the cash flow is not the most exciting part of running a business, but it is an important part of it. It can be a taxing and boring ordeal, but if you cannot manage your money well, the company won’t stand a chance. Keeping an eye on how much money enters and exists the business will help you make smarter decisions and keep moving towards a brighter future.
- Avoid These 4 Cash Flow Mistakes for a Profitable Business
- 9 Ways to Find the Capital You Need to Fund Your Business
- Concentrate on Current Customers to Boost Your Profits
About Universal Funding
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.