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Top 5 Cash Flow Mistakes Small Businesses Make

You're missing out on big opportunities to discover problems before they bleed you dry if you're not monitoring your cash flow properly.

When small business owners experience unanticipated cash flow gaps or are unable to make invoices during sluggish months, it’s a sign that they aren’t keeping track of their cash flow.

Running out of funds for a business is like getting buried in quicksand: when you borrow from one area to pay another, you sink deeper and deeper into the red. Your business commitments – from payroll to loan payments – become increasingly difficult to meet as you try to stay afloat.

The good news is that you don’t have to wait that long. When it comes to your company’s financial health, prevention is always better than cure. You can avoid having to rob Peter to pay Paul by avoiding the cash-flow mistakes we are going to discuss here.

1. Failing to keep track of your cash flow at least once a week

You’re missing out on good opportunities to discover problems before they bleed you dry if you’re not monitoring your cash flow on a weekly, or at least monthly, basis.

In business, there are no “do-overs,” so being on top of your data is crucial. This will offer you a true picture of how much money is coming in and going out of your company.

When small business owners do take the time to examine their cash flow, they are frequently startled by what they discover. When you break it down, you’ll often find that a substantial majority of your business and cash flow comes from a relatively small percentage of your clients.

You’ll be able to unlock the secret to making your business more profitable once you figure out which products/services performs best for which type of customer. From there, you can utilize this information to optimize your product portfolio or modify your pricing to attract more of those profit-generating customers.

Reviewing your cash flow on a regular basis will also help you catch late payments from clients. Few business owners enjoy tracking down unpaid invoices, yet accounts receivable is your company’s lifeblood. How will you be able to pay your bills or fulfill your other financial commitments if you don’t have that money?

Other advantages of keeping a closer eye on your cash flow include being able to detect whether any of your own obligations are past due and determining whether a sluggish month is reason for concern or simply a cyclical component of your business.

2. Spending excessively and prematurely

It’s all too easy to spend too much money up front when launching a business. Small business entrepreneurs are frequently advised to maintain overhead and operational costs as low as possible, particularly in the early stages of their operations. And it’s not about being over frugal, it simply makes more business sense.

Many new business owners make long-term commitments to things they don’t need right now, such as long-term leases on large properties or a lease on a new company car that their budget can’t cover. They frequently imagine they’ll be able to grow into it or become more profitable than they actually are.

Examine every aspect of the firm that costs money, from coffee to staff to office space, before making any large purchases or contracts. As you explore, make sure to distinguish between “needs” and “wants.” There’s a significant probability you’re overspending in other areas as well if you’re overspending in one.

Have you already made a commitment to a loan or a lease? Consider other choices, such as renegotiating with your lenders. Investigate low-hanging fruit, such as switching to a bank with a reduced monthly cost, to save money. Anything that will assist your company stay cash positive is a good thing.

3. Failure to keep cash reserves

Every firm faces challenges, which is why it’s a smart idea to keep several months’ worth of cash on hand.

You’re going to hit a financial snag at some point in your business. And it normally begins six to eight months after your company opens.

You say to yourself, ‘Oh, I’ll have six months to pay my bills, and something big will happen by then.’ Then you learn, like most small business owners, that there isn’t much going on in terms of profit.

This is the stage at which entrepreneurs are confronted with the financial realities and risks of running their own company.

When faced with an unanticipated shortfall, many business owners default to personal resources or assets to cover corporate obligations. It’s important to resist this urge because it might lead to a vicious cycle that leaves you in a worse financial situation than before.

The best way to secure your business and personal finances is to keep a cash reserve. While the size of your cash reserve is entirely up to you, it should be sufficient to cover your expenses during quiet months. You don’t want to be sitting on a significant sum of money without a return, so balance a cash reserve with investment.

4. Failing to invest in order to enhance your wealth

Once your company is profitable, and you have a strong handle on your finances, you should think about investing in other assets to produce passive income.

Choose one or two investment options, such as other businesses, real estate, the stock market, or private mortgages.

Here are some basic investing guidelines:

  • Begin investing as soon as possible – You don’t need a significant sum of money to get started. Compound returns, for example, will help you if you opt to invest in mutual funds, even if you start with a modest amount of money (re-investment of earnings over time).
  • Diversify your investments by purchasing other businesses, real estate, stocks, or private mortgages. You can lower your overall financial risk by investing in a variety of industries and areas. Even if some assets aren’t performing well, you might be able to make money by investing in other businesses and sectors.
  • Invest in Registered Savings Accounts (RSAs) – In a registered retirement savings plan (RRSP), investment income is tax-free until you remove the funds. Contributions to an RRSP are tax-deductible, giving you immediate tax relief as well as tax-deferred growth. You can contribute up to $6,000 per year to a tax-free savings account (TFSA), and investment income and withdrawals are tax-free.

5. Failing to hire a tax and accounting expert

You should engage someone to take care of your accounts and finances as soon as your business becomes lucrative. Make sure you select the right expert to assist you in effectively managing your finances. It’s pointless to make all that money if the money is mismanaged on the back end.

Hiring an accountant will not only help your business stay afloat and reach profitable levels faster, but it will take a lot of stress out of your role as a business owner too. Your business finances will be accurately tracked and your books and financial records will be kept in order by a skilled accountant. Above all, they will aid in the creation of an accurate, ongoing  picture of your cash flow.

This information will be used by an expert accounting and tax specialist to compare historical and current financial conditions, plan and anticipate future financial positions, and provide information to help you make informed business decisions. Then there are those business taxes.  When it comes to taxes, an accountant can assist you in maximizing your return so that you pay less tax and file on time to avoid penalties and interest. If your small business is ever audited, accurately reporting your responsibilities to the Canada Revenue Agency will save you time and energy and if you have been working with an accountant all along this will be much easier to do.

Ready to hire an accountant for your small business? Contact us today, so we can discuss just how K.K Chartered Professional Accountants can help you.