Knowing that cash is important to a business is as basic as understanding that fire is hot. Despite awareness of these facts, running low on funds is a common way of getting burned by cash management problems. Some cash crunches are unexpected, but many are avoidable. Averting common cash management mistakes is key to preventing disaster.
Unless a business has retail customers who pay at the time of sale, it will have accounts receivable to manage. Reviewing what’s owed should occur routinely. Examination each week is advisable. An invoice should never age beyond the due date. A customer who is merely one day late should be contacted personally.
Immediate payment and future promptness are most likely to occur with a polite phone call. Sometimes a customer simply forgot about paying an invoice. Customers with cash flow problems are often embarrassed by their situations. Arranging a partial payment and an installment plan will ease their concerns. The focus of a sound collection system is providing predictable cash flow that sustains the organization.
Bills for some things arrive every month. But a lot of business expenses are incurred at various times during the year. A little income each month must be set aside for paying the bills received in only some months. This cash management is easily administered with a general budget that conveys when these nonrecurring costs are due. A little cash must also be conserved for surprise events, such as replacing broken or worn-out equipment.
Most important of all, payroll expenses should never become a burden. This is not an expense that sneaks up on a business. Enough money for paying staff as well as contract workers must always be set aside in advance. Especially vital is including payroll tax deposits in cash planning.
Efficient personnel management is essential to minimizing payroll expenses. This requires planning for work that lies ahead and appropriately scheduling workers.
An entrepreneur can accidentally succumb to impulse spending that strays off course in the same way a person may blow a family budget. A mindset to resist unnecessary purchases is crucial. You want every purchase aimed at increasing productivity.
For example, stocking up on inventory or supplies at discounted prices may appear beneficial, but that’s not true when it triggers a cash shortage. Bulk purchases are not worthwhile if they crimp business cash. They eliminate the funds necessary for more important actions that result in higher revenue.
Another common temptation to resist is purchasing the latest tech gadgets. Upgrades to business technology should be planned in advance as part of forecasted expenditures in the upcoming year. System replacements are typically only necessary every few years.
Similarly, paying vendors early to obtain discounts might be unadvisable. This can sabotage your objective of holding cash for immediate needs. In fact, a cash shortage may arise that necessitates late payment. By communicating these setbacks immediately to vendors, a business owner is able to explain the temporary difficulty and commit to a promised payment date in the future.