7 Common Mistakes that Impact Cash Flow and How to Avoid Them

Cash flow is a lifeblood for small business. Fail to plan properly for the month-end cash flow needs and you will start losing your sleep when the time arrives to write paychecks for employees or to pay vendor bills. That’s why it is very important to keep a keen eye on money coming in and going out, and plan for those times when you will need sizeable cash outflow. Not only that, but you have to take into account unexpected emergencies that will force you to spend money here and now. In earlier post, we showed how managing your inventory, account payables and receivables can help you better manage your cash flow.
In addition to those tips, you should also look at the obvious as well as not-so-easy-to-find ways in which small business owners squander cash and end up in dire situations. Here are examples of the mistakes many small business owners make and how you can avoid them.

  1. Spending money on expensive furniture before there is sufficient cash inflow. While expensive furniture will impress your customers and make you feel good you may end up in situations where that nice furniture will be the only thing left in your business. SOLUTION: Be Spartan as much as possible till you have extra money to spend on non-essential items.
  2. Renting an office space earlier than needed. Do you really need a full-time office in this day and age of telecommuting? SOLUTION: Work out of home office and utilize virtual communication technology. If you do need physical space look into sharing it with other business to divide the cost.
  3. Hiring full-time employees in a hurry. Full-time employees can cost you lot more than you realize. SOLUTION: Look into hiring temporary workers on an as-needed basis. Also, see if you can outsource the tasks on the cheap rather than doing them in-house.
  4. Not negotiating with vendors. It’s amazing how much money small business owners leave on the table by failing to even ask for discount let alone using the advanced negotiation tactics with their vendors. In these difficult economic times, vendors will go out of their way to keep your business. SOLUTION: Seek quotes from at least 2-3 vendors, play them against each other or simply ask existing vendor for discount! Remember, everything is negotiable in business.
  5. Spending too much on marketing without clear understanding of the return. Why should you keep advertising on the radio when most of the people are not even listening to them anymore? SOLUTION: Explore low-cost marketing techniques. Also, explore how you can utilize online and social media marketing more effectively. Ask marketer, and yourself, to justify the return on marketing investment.
  6. Trying to do everything yourself. On surface this may seem counter-intuitive. After all, doing work yourself will save you money, right? But think about it – the time and effort you spend on the non-essential tasks could be utilized on more productive and higher-return activities if you let others take care of those tasks. SOLUTION: Find out if the task can be handled by someone else more effectively. Delegate, delegate, delegate.
  7. Having large fixed cost and not being flexible. You will be hurt badly with fixed cost when sales go south while expenses remain the same. SOLUTION: Convert fixed cost to variable as much as possible.

What other common mistakes small business owners make that hurt their cash flow? How would you handle them?

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  1. Great post and I think a lot of people are finally grasping the Virtual Assistant concept here in the UK. I support business when they outsource their admin & bookkeeping tasks to me over the internet. Delegating is tough, but so is drowning in paperwork when you could be focussing on what you do best (which is usually income generating stuff!). I’ve seen a big increase in enquiry rates and at the time of writing I now have a Wait-List.


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