How you manage your cash flow can make or break your business. You need to make sure there is a good balance between the money that’s coming in and the money that’s going out. Although this might seem like a simple and straightforward task, a good number of business owners fail to accomplish it. In fact, poor cash flow management is one of the leading causes of business failure in New Zealand.
This mismanagement is often triggered by several misconceptions business owners have about cash flow. So, to make sure you don’t commit the same mistake, let’s debunk some of the most common cash flow myths.
Myth #1: Increased profit leads to positive cash flow
It seems like a no-brainer: the more profit you earn, the healthier your cash flow would be. Unfortunately, business matters are rarely this simple. Cash flow and profit are both significant financial parameters in business, but they are not directly correlated.
Profit is essentially the money you’re left with after expenses have been deducted from your revenue. Cash flow, on the other hand, represents that money that comes in and out of your business. It indicates the amount of cash you have available at the moment.
Cash flow and profit don’t always align with each other. Let’s say your business generated more sales in June than it did in May. This is great news as it indicates an increase in profit. But your business offers a 30-day payment period, so the actual money from your June sales won’t reach your bank for another month. This will become a problem when your bills start rolling in and you don’t have enough cash on hand to pay them. In this scenario, your profits may have increased, but you still experienced a negative cash flow.
Myth #2: A bank loan can always bridge cash flow gaps
While a bank loan can certainly help keep your cash reserves from running out, it’s not wise to rely on it as your sole financing method. Borrowing money can be an expensive route for your business, especially if you’re saddled with high interest rates. There’s also the chance that you might not be able to pay off the loan on time and you’d end up sinking into debt.
Myth #3: Small businesses don’t need cash flow management
This can’t be farther from the truth. No matter the size of your business, you need to implement proper cash flow management strategies if you are to be successful. Start-ups and small businesses stand to benefit the most from generating monthly cash flow statements and projections. They generally have limited funds, so they must maintain strict control over their cash flow because they have less of a buffer in case of unexpected costs.
When managing small business cash flow, the key is to be more present and active in the process. Although it might seem simple at first, there are many variables that you will need to keep track of. It would also help to use an accounting software to make the process easier and more efficient.
Myth #4: Strong accounts receivable equals a healthy cash flow
Relying on your accounts receivable to indicate cash flow health is a lot like counting chickens before they hatch. You may have a long list of receivables but until those invoices are paid in full, they would be nothing more than promises from your clients.
The danger lies in being complacent and passively waiting for clients to fulfil those promises. To avoid cash flow problems, you need to take a more active role in your collections process. Create and implement a process for following up on unpaid invoices. Use multiple methods of communication when sending invoice reminders, including emails, phone calls, and letters.
If the payment deadline has elapsed and you’re still unable to contact clients, then it’s time to hire a debt collection agency. By forwarding outstanding accounts to experts, you can free up your time while still ensuring your unpaid invoices will be paid.
Here at Slater Byrne Recoveries, we have years of experience helping businesses of all sizes recover debts successfully. We assist with risk assessment and cash flow management. Click here to find out more about our services.