Written by: Jennifer Tomaino, Head of Treasury Services, Union Savings Bank
Opening and running a small business in Connecticut is a feat of determination, commitment and balance. Among many of the things to remember as a new or seasoned business owner is the importance of small business cash flow. As we explored in a previous blog post, business cash flow is the money that is currently flowing into – and out of – your business. The state of your profits and accounts receivable is not necessarily a clear indication of cash flow and vice versa. With so many misconceptions floating around about small business cash flow, mistakes can be made that can set you and your business back. Here are 5 small business cash flow mistakes to avoid when running your business.
Prioritizing profit over cash flow
This is a common mistake even seasoned business owners can make, largely due to the misconception that cash flow and profits are synonymous. In reality, cash flow indicates the money you have now, so a positive cash flow signifies an increase in liquid assets. This does not always align with profit. Say, for example, your business had a strong month of sales, so the profit increased from the prior month, which had weaker sales. This is great, but you’ve got bills to pay now and those funds won’t go through accounts receivables for 30 days. In this scenario, your profits increased, but you may actually have negative cash flow.
All too often, businesses find themselves prioritizing profit over cash flow when they rely too heavily on a few high paying customers. For example, say the widget that your manufacturing business produces is used by a few customers exclusively, but when a competitor comes to town and beats your prices, those reliable customers jump ship.
For a business that focuses on cash flow and has a diversified customer list, this loss will certainly deal a significant blow but it won’t take the business down. However, if that manufacturer relied upon those select customers to keep the business afloat, they may find themselves in very deep water.
Ignoring customers’ credit
Another cash flow mistake business owners make when it comes to their customers is failing to take credit into consideration. The inflow of cash to your business is dependent upon customers paying you on time and in full, so when customers’ credit comes into question, it’s important to take that into consideration. One late payment on a small scale probably won’t put your business in jeopardy, however, consistently delayed payments can threaten your cash flow – and your business.
Paying vendors too late
Customers aren’t the only ones whose on-time payments can make or break your business. Paying vendors too late is a common small business cash flow mistake that can severely compromise your bottom line, not to mention your reputation. After enough late payments, you could be facing larger issues and may even struggle to find vendors who will sell to you, at least without slapping on major fees.
From a cash flow perspective, late payments can throw off your cycle for a month or two, and consistently late payments can send it off the rails completely. Once businesses get into a pattern of playing catch up, it takes a lot of work to set their cycles right again.
If the main cause of late payments is time management, there are tools available to you that can help keep your business on track. Automated Clearing House, or ACH, payments allow businesses to hang onto their money until the day before it’s due, keeping cash available longer without incurring late fees. Small business owners simply set up or import an electronic file into their online banking system and send payments for overnight delivery to their vendors. For more ways to help your business avoid late payments, read How Automation Can Improve Your Small Business Cash Flow Management.
Paying vendors too early
Late payments aren’t the only threat to small businesses when it comes to your vendors. Submitting payments too early can also compromise your cash flow cycle by limiting the money available to cover other payments and expenses. ACH payments can help your business in these cases, too, by shortening the time between when you submit a payment and when your vendor receives it, often to just 24 hours.
Not tracking your cash flow
The most worrisome of small business cash flow mistakes is not tracking your cash flow at all. Without a clear picture of when money is coming in and going out of your business, not to mention how much, making any one of the other four mistakes above is inevitable. And attempting to forecast any aspect of your business becomes an impossible feat.
Thanks to cash flow automation tools like ACH transactions, Positive Pay and remote check deposit, many of the more cumbersome and time-consuming parts of managing your small business cash flow can be done in a few clicks. With these tools in place, visualizing your small business cash flow and creating a plan becomes easier. And this, in turn, can help your business grow.
Small business cash flow mistakes can happen to even the most seasoned business owner. Having the right tools at your disposal can help you avoid large scale mistakes that can compromise your business or prevent your business from growing according to your vision. If you’re ready to take your small business cash flow to the next level, our Business Team can help. Contact us today.