Every small business needs capital to succeed. You might be making cash flow mistakes, though, that threaten your business's success. As many as eight out of 10 small businesses and start-ups fail because of poor cash-flow management, according to industry reports. Take time today to analyze your small business and correct any cash flow mistakes. Learn more about Cash Flow Management Insurance to help protect operations and cash reserves.
Common cash flow mistakes
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Buy Impulsively
Whether you're brand new to business or have been in operation for years, impulse buying is tempting. However, it can ruin your ability to buy what you need, weather slow seasons and grow.
Curb impulse buying when you create a budget and follow it. Before you buy anything, analyze its purpose, consider how often the item will be used and check for lower-cost alternatives. For example, insurance is a necessity, but shop around for the best rates on the coverage you need.
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Don't Get Paid in Advance
When you allow customers to pay after you perform a service or provide a product, you risk not getting your money and your cash becomes tied up in materials.
Always collect a portion of the total cost upfront and use that cash to pay for materials. Be sure to collect the full payment before you make the final delivery.
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Let Late Payments Slide
You likely have relationships with most of your customers and may not push them to pay past-due invoices. However, if you don't receive payment for the goods and services you provide, it won't take long for your business to suffer.
Secure your business's future by collecting payments on time: set up payment reminders, charge interest on past-due accounts and require invoices to be paid in full before delivering further goods or services. Consider a collections policy to protect your bottom line.
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Don't Keep Enough Cash on Hand
You never know when an emergency will occur, and you need to prepare for slow times.
Set aside adequate cash. A cushion of three to six months of operating expenses can help you stay in business if slow sales or an emergency occurs.
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Make Unrealistic Revenue Projections
As a small business owner, you may be optimistic about future sales. Creating unrealistic projections could cause you to overextend yourself now.
Be honest and objective when predicting your revenue. Use accurate expense and sales records and past data when you calculate future revenue.
Your small business's success depends in part on your cash flow. Stop making these mistakes today as you pave the way for a positive future. For assistance, contact your business mentor or local SCORE chapter, or read Insurance insights: cash flow, workplace accommodations, property valuation, construction safety, and flow.
Frequently Asked Questions
How much cash should a small business keep on hand?
Many advisers recommend keeping a cushion equal to three to six months of operating expenses, but the right amount depends on your industry and variability of revenue.
Is it reasonable to require deposits from customers?
Yes — collecting a portion of the total cost upfront helps cover materials and reduces the risk of nonpayment, and is common practice for many businesses.
What should I do about customers who pay late?
Set clear payment terms, send reminders, consider interest or late fees for overdue invoices, and have a collections plan for persistent nonpayment.
Can insurance help with cash-flow problems?
Certain insurance products can protect assets and reduce financial risk; review options that are appropriate for your business needs with a trusted advisor.