Avoid these Cash Management Mistakes

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.

Don’t Let Your Numbers Phobia Sink Your Business

The time has come to close the gap between accountants’ and entrepreneurs’ different perceptions of finance.

Business owners with a fear of numbers need accounting experts to help them overcome phobias, and accountants need to conquer the addiction that leads them to record numbers without evaluating the financial data.

Entrepreneurs realize that numbers on a page can translate into strategies that work when accountants explain debits and credits in a way owners can understand and act on.

Entrepreneurs are focused on growing their operations and want to stop little problems before they impede success. For example, an out-of-whack inventory indicates the need for a new process of accurately recording cost of sales. This information is revealed in financial statements, and if caught in time, a potential problem can be resolved before it even becomes a problem.

Are some charges on the company credit card missing from accounting records? Do payroll expenses not equal gross wages on quarterly IRS reports? Accountants anticipate such difficulties, because they know entrepreneurs hate reconciling.

But as much as they hate reconciling, business owners still want a tax deduction for their expenditures, and to avoid conflicting information that may trigger IRS trouble.

Entrepreneurs should ask their accountants how to find vital business information in their financial records. And accountants should make suggestions regarding ways of improving record-keeping procedures to maximize the usefulness of financial statements. It’s a win-win.