4 Common Cash Flow Mistakes to Avoid at All Costs - A Guide for Small Business Owners

There is one thing that every small business owner should be focusing on, and that's cash flow. But when you're juggling everything else in your life - kids, a spouse, work - it can be easy to make mistakes with your finances. However, these errors can lead to serious consequences for your company as well as the rest of your life. As they say, knowledge is power… With that in mind, here are the main cash flow mistakes we hear about from our community of business owners and advisors, which you can now avoid at all costs.

1. Unrealistic expectations lead to cash flow problems

This applies to all areas of your business finances.  You need to know what your cash flow is and have a plan in place for when you will receive cash from clients. You also need to be realistic about how much money you can spend before it becomes time to generate more revenue - perhaps by putting together an invoice or pitching another client.

Business owners that try to work on best-case scenarios all the time often run into cash flow problems as it very seldom that everything goes right. If you have previous months to look back on then try using cash flow analysis to predict future revenue and expenses from a previous cash flow statement.

2. Overestimating your future accounts receivable

Everyone likes an optimist, unfortunately, your cash flow doesn't. When it comes to putting together a cash flow forecast, as a small business owner it can be better to err on the side of caution. Inflating what you expect to see in your accounts receivable, or what your profit margin is, is one of the common cash flow problems we see often.

Having a cash flow forecast is going to give you the confidence to make predictions with insight – and act accordingly. Protect yourself and your company by putting your figures into a forecast, and you can start planning your future. Remember that other than you, your team knows your business best. Use their creativity and points of view to diversify and expand ideas.

There’s no way of predicting your incoming cash to the penny, so rely on scenario planning to get an idea. If anything, you should underestimate your sales volumes so you can prepare yourself for the worst. Create a base assumption and build variations on top to really get the most of scenario planning.

3. Ignoring your budget and cash flow forecast

This is one of the classic cash flow mistakes that small business owners make, and can be a big part of the cash flow problems that a lot of them face early on. Even the best-laid plans can go awry if you ignore them.

Keeping your eyes firmly on both of these tools will bridge the gap between reality and your dreams, so if your business begins to show signs of going off course in either dichotomy, you’re going to be able to prevent damage instead of trying to repair it. Both your forecast and budget should reflect your plans for the future but are based on past experience.

4. Not leaving yourself a cash buffer

A lot of small business owners run into cash flow problems when they don't leave enough of a buffer. There are certain things that can help bridge this gap but credit cards and loans are not a long-term solution. It is always better to make sure that you keep a cash reserve to stop you from having to reach to these solutions.

Sometimes you’re going to need to dip into your cash reserves. But remember, rule one of business is never to completely run out of cash. Liquid assets are easily converted into cash, with little to no impact on their value. Using your assets to reinvest in your business and help it grow sustainably. You could hire more staff, acquire new stock, and make improvements to premises.