Seven Deadly Sins of Cash Flow Management

Confession time. Are you guilty of indulging in any of these seven deadly sins? Running your business based on your bank account, failing to forecast, spending money that’s not yours, being a bank for your customers, forgetting to save, overestimating sales or overspending on expenses. Want to improve your cash flow? Start by avoiding these seven deadly sins!

Seven deadly sins women in business make when (not) managing their cash flow

1. My bank account looks good, therefore it’s OK to spend money
Many women in business make major spending decisions based on how much money is in their bank account. They tend to forget that a business collects GST on behalf of the Government and some of that money is not theirs. If you don’t have a clear understanding of your true financial position, it’s easy to make bad business decisions that can send your business broke.

2. Failing to forecast. Help! I’ve got an impending cash flow crisis
One of the biggest mistake women make is to only look at the business’ cash flow when a crisis is about to hit. At that stage, it’s too late and you have minimal options to choose from – like short-term working capital loans (with high interest rates). By forecasting your cash flow at least 12 weeks in advance you can predict when you might run out of cash and put solutions in place to avoid a crisis.To forecast your cash position, start by listing all the income you expect to receive and all your business’ expenses and when they fall due. Plan this for at least the next 12 weeks to identify any potential cash shortages. You can then put strategies in place to ensure your business has enough money to keep going. (See our Seven Strategies for Improving Cash Flow).

3. Spending cash that’s not yours
Best practice is to put money into a separate bank account for GST, PAYG, Super and even insurances or industry specific professional memberships. You should also put money into a separate bank account for your personal income tax. Use PAYG Withholding Calculator to work out how much you should put aside.

4. Being a bank for your customers
This is a big problem for many small business owners. How many people owe you money? What’s the total value of your debtors or account receivables? One of the biggest cash flow killers, especially for growing businesses, is not call in your debtors. (See our guide on how to “Call in your Debts“) The longer you leave it, the harder it is to collect the debt. If necessary, change your payment terms to 7 or 14 days, use technology solutions to automatically send reminders and statements, for big jobs or projects invoice progress payments. You can’t afford to be a bank for your customers.

5. Not Saving for a Rainy Day
For a business to thrive, it must plan to survive. Whilst small business owners do their best to anticipate the future, without a crystal ball it’s hard to predict everything. This means unexpectedly losing a key customer, staff member or best-selling product line can have a serious impact on your short-term cash supplies. So, save for a rainy day! Knowing you have enough money in cash reserves to pay critical expenses (like rent, lease payment on equipment, staff wages) for a month, helps manage the stress associated with running a business. Remember to grow your business, you need cash.  Whether that’s to employ more staff or build up your inventory, it all needs cash up front. If you can build a cash reserve, you can fund growth yourself rather than go into debt.

6. Overestimating future sales
It’s a fine line between being an optimist and being unrealistic. Optimism is a common trait amongst successful business women (what realistic person would persist in the face of so many challenges and stress)! It’s important to be realistic when forecasting sales, use actual sales data and industry benchmarks.

7. Overspending on expenses
Ever said, “You’ve got to spend money, to make money”? There is some truth to this adage but spending money you don’t have is a sure fire way of causing a cash flow crisis. You need to consider the cost benefits of every single expense. Remember, every dollar you spend on your business is one less dollar from your profit.

The first step to managing your cash flow so you can grow and scale your business is becoming aware of which (if any) of the seven deadly sins you’re committing and STOP! Want to learn more about how to improve your cash flow? Read our blog about the Seven Strategies for Improving your Cash Flow or attend our one-day “Avoid a Cash Flow Crisis” Workshop.