7 Cashflow Mistakes That Can Kill Your Business

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Small business owners are often overloaded with tons of activities revolving around their business, and they have very little time left for managing cash flows or scratching their heads on company’s finances. On the other hand, mismanaging your company’s funds might lead to the total failure of your business.

Even though you have the brightest of ideas and your company is on the growth ride from the very first day, it is often seen that 80% of the businesses, big or small, fail or close down, just because they cannot manage their cash flows.

To add to the injury, certain hidden costs or expenses have an adverse impact on the cash flows, which are very tough to manage since they cannot be perceived.

In this article, we run through some of the deadly cashflow mistakes that can kill your business. Find out if you are making one of these mistakes and learn how to avoid these.

1. Forced Growth

One of my friends who runs a software development company started experimenting with Facebook ADs. In the first month itself, he got good returns on his investment. He immediately increased his Ad spend by 5 times anticipating 5x growth in sales.

Well, that didn’t happen. He did generate more leads but not in proportion to the Ad spend. He spent more than he earned in that month and ended up screwing his cash flow. He had to take a short-term loan to cover the month’s expenses.

It is a good thing for a company to have a great growth story, but sometimes to have excessive forced growth can spell doom for the business.

What’s forced growth? It would call for more cash to be paid to the staff, a bigger office for accommodating more people and clients, a rollout of new products, higher than needed AD spend, etc, which would call for greater expenses.

These are effort-oriented tasks that need to be handled rapidly as the loss of too much cash will severely affect your day-to-day operations. These extended services bring in more revenues, but with revenue comes in more cash outflows. Efficiently estimating these cash outages in due course of time can help you prepare for exigencies.

 

2. Spending Too Much on Sales

As a small business, it is impervious to fetch new customers, even at the cost of incurring losses. There are two metrics to identify whether your client is bringing you the profit that you anticipated. One of them is the ‘Acquisition Cost’ of the customer, which is the amount spent on gaining one customer.

The other is the ‘Lifetime Value’ of the customer, which is the total revenue generated by a customer over its lifespan. It has to be ensured that the Lifetime value must be greater than the acquisition cost. In this way, a positive effect is felt on the cash flows of the company.

Overspending on the acquisition cost might lead to gaining a small customer with a very limited return. Many businesses falter on this point as they perceive that the more the customers, the more the profit.

There are a lot of hidden elements to the acquisition cost. For example, the salary of the salesperson, the amount spent on his mobile and an internet connection, the cost of his seat in the office, his commissions, etc. You need to add up all these indirect costs to correctly calculate customer acquisition costs.

If you don’t do this, you’ll unknowingly start burning more money than you earn and eventually affect your cash flow.

 

3. Incorrect Calculation Of Profitability

Many-a-times, businesses feel that there is enough profit from every transaction they enter into. However, businesses of all sizes run into severe cash problems because they have committed too much on overheads.

Sometimes, a healthy, cash-rich company buys a huge office or invests too much in rent, fancy utilities, etc, and treat them as trivial at first.

Nevertheless, when the going gets tough, it becomes difficult for the company to keep up with these excessively committed costs and end up losing cash rapidly. Thus, a company can become cash-hungry from a cash-rich company in a matter of time.

Anticipating these expenses and the consequences of the same is necessary for the well-being of the company. One can only be profitable when there is enough money in the bank accounts left after paying off all your expenses.

 

4. Ignoring the Seasonal Nature of the Business

This is applicable for some businesses that do not have a year-long operation. These businesses find themselves tremendously cash-rich during their peak seasons and on the other hand face difficulty in managing daily cash outflows.

When the cash-rich season begins, it leads to overhead commitments that are difficult to maintain during the off-season. Besides, these off-seasons result in discounts and offers, which reduce the margins for the sake of maintaining some level of sales.

There should be enough provisions for these off-seasons in your financial plan. For, e.g., Diwali and Marriage seasons see a lot of sales in Jewellery and Clothes.

However, for the rest of the year, the sales deplete rapidly, resulting in greater cash outflow. As such, there must be ample amount set aside for fixed expenses to be incurred.

7 Cashflow Mistakes That Can Kill Your Business

5. Sleeping Over Late Payments or Overdue Amounts

Late receipts against your invoices can spell trouble for your business. It may sound trivial, but the fact is, when your customer delays the payments, it would be difficult for you to pay to your vendor.

Moreover, if your vendor does not wait for his payments that would mean you have to pay him off to maintain future credibility. As a result, you will block a major chunk of your funds in this working capital, and you will not be able to make operating expenses easily.

Too much credit can hamper your working capital requirements and suppliers lose credibility very often since payments come in after approximately 3 months. That means no payments or holding expenses for 3 months, which can severely hamper operations on a large scale.

 

6. Improper Management Of Taxes

Tax is a fine for doing well. Sounds funny but it is true. Taxes are statutory obligations that are obligatory in nature and has to be paid mandatorily, whether you like it or not. Moreover, it has to be paid whenever it is due.

Whenever you miss the deadlines, it can attract interests and penalties that can influence the cash flows. If there are several defaults at the taxpayers’ end, then the Income tax department or the Commercial Taxes Department can come knocking on your door for an audit of operations, again attracting more penalties and interests on penalties. Thus, taxes have to be accounted for, and accurate calculations must be made in the financial plan.

 

7. Not Preparing In Advance For Emergencies

This is something over which no man has control. These are totally unexpected and unforeseen expenses, which can seriously damage the cash profile of any company.

A natural disaster can trigger chaos across the country or the geographical zone in which the company operates. One can also lose his entire office following an earthquake.

Your top performer may leave the company at a moment’s notice, or there is a negative complaint from your most reputed customer. Such stuff cannot be anticipated in advance and ultimately end up losing business almost instantaneously.

A contingency plan is what one must have to keep himself safe from these mishaps. There is no way one can avoid these, but can have an emergency fund created to at least maintain the business running with bare necessities.

The best way to secure yourself from any Act of God is Insurance. Most of the top insurance providers have an act of God specifically mentioned in the contracts.

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