Common Cash Pitfalls for Business Owners to Avoid

Mar 02 2020

Cashflow matters at all stages of business ownership. Whether you are trying to get a new business venture off the ground, or you’ve been in business for years, it is common to run into cash problems that can drain your company account. However, these problems can be avoided if you are practical with your financial processes.

A unified accounting and support team can offer the ongoing cash flow support that you need. EFM has worked with many SMEs, and we’ve seen the trends that often happen within growing companies. This experience gives us the insight to help our clients sidestep some of the common issues that impact a business’s cash flow performance.

Why Cashflow Matters

Naturally, you need money in the bank to keep your business operating. There are times when you know that the money will be coming through because your customers are going to pay you, so it might seem like a good idea to tap into credit should you have immediate expenses that need to be paid urgently. This short-term strategy can lead to a domino effect of financial issues, especially if you don’t have a robust accounting plan in place.

Not only do you need to monitor the money that comes into your business when customers buy your products and services, but you also need to look ahead to the future to see how much money needs to be spent on expenses. For example, a big tax bill can sneak up on you if you aren’t tracking the flow of money, causing you to be cash-poor and unable to keep up with the costs of running your business.

When the bills need to be paid and you don’t have any money in the bank, the cashflow issues could potentially result in business failure. Rent needs to be covered, employees need to be paid, inventory needs to be restocked, and you have a long list of other expenses that are required to keep your company running. Making sure that you have enough cash in the bank to cover these expenses each month requires a robust plan.

Common Cash Pitfalls

Learning about common cash pitfalls can be an effective way to bring awareness to your business practices, helping you to avoid these issues. You can learn from the mistakes of other business owners so that you don’t have to walk the same difficult path of cashflow problems.

Our nationwide team of FDs and FCs at EFM are here to guide your financial decisions and help you avoid these problems.

Here are some of the most common cash pitfalls that businesses face:

  • Going at it alone: When a business owner chooses a DIY approach to accounting and bookkeeping, they are usually motivated to save the money that would have been spent on accounting services. Taking on these financial responsibilities might be one of the costliest mistakes you can make as a business owner. Not only are important financial details often overlooked with DIY accounting, but you probably don’t have the experience to drill down into the financial statements and see what is coming up in the future. You need clear insights of your expenses and income so you can optimise your business practices, which in turn will help to boost your profits.
  • Use the Right Tools: Excel can be a great tool for many projects within your company, but you are making a mistake if you are still using a spreadsheet to track your income and expenses. You must use robust accounting software that can generate reports and help you see a clear picture of your business profits and losses. The right accounting software will help you avoid mistakes that often come when the numbers are calculated manually.
  • Accounting Software Training: It is important to use the right accounting software to match the needs of your company, and it is also important that your team is trained on the most effective strategies for the use of this software. The simplest way to be sure that you are leveraging the full power of financial software is to hire an experienced accounting team to assist with the setup and ongoing maintenance of your system.
  • Overlooking Accounts Receivables: Having unpaid invoices for current sales can inflate your numbers, but don’t count on the income until you have money in the bank. Too often, small business owners have a gap in their accounts receivables process. Make sure you have a strategy in place to follow up on outstanding invoices. Late or unpaid invoices can have a major impact on your cash flow.
  • No Rainy-Day Account: Don’t make the mistake of spending every penny that comes into your business bank account. There are always opportunities to spend money on marketing and business development. While these expenses are good investments, it can be harmful to your company if you don’t have money set aside for a rainy day. It is common for small businesses to have slow seasons, which means that you need to have enough cash on hand to cover the costs when sales are trickling through. Set up a savings account designed for emergencies only. Ideally, this fund should have a minimum of three months of expenses.
  • Overspending: It doesn’t matter how much money you are bringing in, you won’t be able to make a profit if you are spending more than you are collecting. Often, businesses get bogged down with unnecessary subscriptions and services that eat into the cash flow and profitability each month. Take time to discuss your expenses with a financial professional, such as an experienced financial controller. Find unnecessary expenditure lines you can cut to protect your cash flow.
  • Excess Inventory: It is important to be sure that you have product on hand when customers order your products. However, holding onto too much inventory can tie up your cash and make it difficult to keep up with ongoing expenses. Identify your sales trends and match your ordering to these. The goal is to have stock on hand for the shortest amount of time before it is sold. Your inventory can be managed by evaluating sales volumes, forecasts, supplier turnaround time, and available cash on hand. Having a system of ongoing inventory monitoring means you can reorder when necessary, helping you avoid stock shortages and the potential loss of custom.
  • Future Forecasting: While you are working to create opportunities for business growth, don’t bank on the money until the sales have occurred. One of the common cash pitfalls that we see is when business owners spend money now, anticipating that they will have the necessary income needed in the future. You shouldn’t count on a sudden boom in your business in the future. The best solution is to evaluate your business records and data so you can see the trends that are normal for your business and industry.
  • Debt Burdens: Too much business debt can eat away at your profit margins because of interest costs. Look for ways that you can manage your cash flow to pay off debt. Lowering these balances will reduce the amount of money that you are paying in overdraft and interest costs, and potentially in late payment fees.

The Simplest Way to Avoid Cashflow Problems

We’ve found that the most common reason business owners encounter cashflow problems is because they don’t have effective processes in place. You must know the current cash position of your company, as well as upcoming expenses that will need to be paid. If you are just going with the flow and hoping that the money will be there at the right time, then it is likely that you will encounter big cashflow problems in the future!

As a business owner, you don’t need to take accounting classes or spend hours on YouTube watching accounting tutorials. The fastest and most effective solution to ensure that you are managing your financial reports and cash flow is to tap into the services offered by an experienced accounting team.

At EFM Ireland, our goal is to reduce your stress by creating a financial process that helps your business succeed. Our team has years of experience in the industry. You can tap into our expertise and insights to find the right solutions that will support your financial needs.

We are here to answer your questions and help you find the right solutions to meet the unique needs of your business. We’ll explain the available services so you can see the benefits available for your company.

Get in touch today via [email protected] or call 01582 516300 to set up your free 1-hour consultation session.

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