7 Deadly Cash Flow Mistakes

Do You Make These 7 Deadly Cash Flow Mistakes?

Managing cash flow is every small business owner's mostimportant function. Avoid these seven deadly mistakes to makesure you aren't creating cash flow problems in your business.

1. Using the "Fly By The Seat of Your Pants" Accounting Method.

When tax time rolls around do you find yourself pawing throughpiles of paper on your desk looking for credit card receiptsfrom your business trip? Or are you upside down digging underthe seat of your car trying to figure out where all your gasreceipts are? Are you wondering if that coffee stained piece ofpaper is an invoice from a supplier? Do you have a vague feelingthat someone, somewhere owes you money but, you just can'tremember who it is? If so, you're probably guilty of operatingwith the "Fly By the Seat of Your Pants" accounting method.

Using this accounting method has a tremendous impact on yourbusiness's cash flow. Unless you have a system to track yourbusiness finances, you'll always be operating in the dark and indanger of imitating George of the Jungle as he slams into a tree.

2. Not Knowing What the Numbers Are All About.

Once you have a real honest to goodness useful accounting systemthat's where the real fun starts. You've got a bunch of numbersbut what in the world do you do with them? Understanding whatthe numbers mean is crucial to your cash flow. Are salestrending up or down? Are expenses rising faster than sales? Isone product more profitable or better selling than another? Howmuch do I need to sell to meet expenses each month? Can I take apaycheck this month? The answers all lie in the numbers.

3. Mismanaging Credit: I Owe You, You Owe Me.

There are two ways to mismanage credit in small business:

1. Granting credit without wise credit policies 2. Using creditwith no plan of how to pay the bill.

Both have a huge impact on your cash flow and are often closelyrelated. Here's a scenario to demonstrate that point. You havean opportunity to work on a big project but to do the projectyou need to order materials. So, you order materials from asupplier who expects payment in 30 days but you won't receivecash for the project for 60 days (or 90). Immediately you've putyourself into a cash flow crunch that could take months or yearsto recover from financially. In the meantime you've passed onsmaller jobs that would have provided quicker cash at less cost.And, if you're not able to come up with the cash for yoursupplier, you've endangered that relationship as well.

4. Ignoring the relationship between Receivables and Payables.

Do your Receivables and Payables "play nice" with each other? Ina perfect world your receivables (what customers owe you) wouldbe paid just in time for you to pay your payables (what you oweyour vendors). But, if you're a small business owner you knowRule #1 is "Stuff Happens". The customer you thought would payhis bill this week, doesn't. So the bills you thought you couldpay this week, don't get paid.

Are your Payables in balance with you Receivables? If what youowe to others is far more than what is owed to you, then,Houston, you have a problem.

And it's not just the balance that's important, it's the qualityas well. If your receivables are as old as your Aunt Tilly,chances are good you'll never see the cash.

5. Focusing on profit instead of cash flow.

Ahh, Profit. The ultimate goal of every business. Or is it? Didyou know that many businesses that fail are operating at aprofit? How can that be? For the small business, cash flow isthe ultimate goal. No cash flow. No business. Period.

What's the difference? Mostly the difference is in the decisionmaking process. "If I take on this big job, it will earn me ahuge profit, but if I take on five smaller jobs, I'll have cashto pay my bills." Yes, you want to be profitable but everydecision has to be measured against the effect it will have oncash flow.

6. Forgetting your debt to society.

Some bills are easy to forget. Bills like sales tax, payrolltaxes, estimated taxes. They sort of sit out there, almost offthe radar screen. They don't have to be paid right away. It'seasy to forget them until BAM! they're due and they're due rightnow. And you better have the money to pay them or you're in hotwater with the Tax Man. That's not a place anyone wants to be.Pay them late or not at all and you end up with penalties andinterest on top of what's already due. Cash flow problems resultas you rob Peter to pay Paul. It can take months or even yearsto recover.

7. Spending your company's future on a speed boat.

Haven't you always wanted a speed boat? Or a fancy car? Or anall expense paid trip to the Bahamas? It might be tempting totry to pass your personal purchases off as tax deductiblebusiness expenses. But, it's a bad idea for two reasons.

The folks who work at the IRS are over-worked but they're notstupid. The last thing you need is an audit. An audit that couldreveal your transgressions and could result in an unexpected taxbill plus penalties and interest. Again, huge cash flow headache!

Here's the other reason it's a bad idea. Are you spending yourcompany's future on frivolous or unnecessary expenses? Smallbusinesses operate close to the edge. Unless you have a reserveto see you through the tough times, you're always in danger ofbeing on the wrong side of that edge. You've got to take care ofthe golden egg laying goose first. Then, you can pay yourself aproperly taxed bonus and buy all the toys you want.

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