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 the company’s finances. Whereas, mismanaging your company’s funds might lead to 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, may be big or small, fail 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.
Here we've fetched 3 mistakes which you should avoid while growing your business.
Let's imagine a scenario If you run a software development company and started experimenting with Facebook ADs. In the first month itself, maybe you get good returns on this investment. And you immediately increase AD spend by 5 times anticipating 5x growth in sales.
Then there can be two possibilities, Either you get success or you would generate more leads but not in proportion to the AD spend. You could spend more than you earned in that month and ended up screwing the cash flow. This results to take a short term loan to cover up the month’s expenses.
It is a good thing for a company to have a great growth story, 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, bigger office for accommodating more people and clients, a rollout of new products, higher than needed AD spend, etc. that would call for greater expenses.
These are effort-oriented tasks that need to be handled rapidly as 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.
- 2. Incorrect Calculation Of Profitability
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For example, if a customer buys a book at Rs. 600 and sells it at Rs. 1,000. He is always in a myth that he was making 30-40% on every sale considering minor expenses. But when he prepared his balance sheet at the end of the year, he realised that he made losses. He did not consider the marketplace commission, transaction fee, shipping cost (which varied for every order), the cost of storing the inventory and most importantly – cost of returns.
Often, 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.
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.
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.
- 3. Sleeping Over Late Payments or Overdue Amounts
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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 fo r 3 months, which can severely hamper operations on a large scale.So these were few cash flow mistakes which should be avoided, so that your business may not run out of cash...