You already know that good cash management is paramount for any business, particularly small business. Still, running low on funds is a common occurrence for small businesses, and even experienced entrepreneurs make errors when managing cash.
Learning how to recognize many of these common mistakes is the first step to avoiding them. Here are some typical traps for the unwary:
Spending mistakes
Just like householders who unwittingly blow their family budgets, entrepreneurs are predisposed to impulse spending. Eliminate unnecessary purchases.
For instance, resist the temptation to acquire the latest tech gadgets. Not only do they not guarantee increased productivity, a technology upgrade is a budget item. You should be setting aside funds so you can replace your current technology every few years. Capital expenditures are not surprise purchases.
Stocking up on supplies or inventory is another mistake that seems appealing until it starts to squeeze your cash flow. The marginal savings from bulk orders typically aren’t worth the resulting cash shortage. Items that lie around unused or sit on shelves unsold tie up funds you should be using for more important endeavors.
Managing bills
When managing bill payments, be aware of other priorities. For example, you need to reserve funds for new equipment. Machines eventually wear out, and you will need money to replace them. As well, when a big job comes along, you’ll need extra cash to cover costs incurred before you get paid. Always account for these priorities when evaluating available funds for bill payment.
Never pay a vendor too early and never promise a payment you can’t deliver. Your goal is consistent cash. You risk having a shortage of cash in the growing phase of your business when you pay vendors early to get discounts.
When you do see a drop in cash, communicate early with key vendors. Let them know why you have a cash setback. Identify whether the difficulty is temporary or systemic. Only make promises accordingly.
Controlling collections
Never allow accounts receivable to age beyond the due dates. Set aside time at least once a week to review what’s owed to you.
Personally call every customer who is even one day late in remitting payment. Sure, you’re busy and don’t want to be a pest, but you also don’t want to jeopardize the sustainability of your organization.
Polite phone calls often elicit the response from customers that they simply forgot about your invoice. Maybe they have cash flow problems but were too embarrassed to send a partial payment. Make firm payment arrangements with everyone, including specific dates for expected amounts.
Payroll management
Always have enough money set aside to fund the next payroll. Payday should never sneak up on you. Know how much manpower is required for tasks that lie ahead and schedule workers accordingly. This system is the essence of project management and the root of minimizing payroll expenses.
Last but not least – and you’ve heard this one before – remit your payroll tax deposits on time. Borrow from anyone rather than the US Treasury.