Starting a new business is no walk in the park. And your new company surviving? That takes serious legwork, too.
The longevity of your company will depend on how money moves through your company — aka cash flow. If you’re not a financial expert, you may face some challenges ahead. But we’re here to show you what those challenges look like, so you can avoid them. Keep reading to learn the cash flow mistakes new business owners should avoid at all costs.
What Is Cash Flow?
Cash flow is the net balance of money moving in and out of your business. Or, as start-up financial consultant Jasdeep Singh puts it: it’s the lifeblood of any small business.
As a small business owner, you use this income stream to pay your employers, supplies, and other expenses. A positive cash flow is when your company has the money to cover its expenses (and then some). On the other hand, a negative cash flow means you’re spending way more than your company makes.
Of course, you want a positive cash flow. Maintain a positive cash flow by avoiding these common mistakes:
1. Miscalculating Startup Costs
Starting on the right foot means setting a realistic budget for your small business. When you underestimate your startup costs, your cash reserves will bleed.
Can you imagine how difficult it’d be to go belly up before the doors are open? Thus, it’s vital to create a budget within your means. For quick pointers, check out the example spreadsheet from the Small Business Association. This example may not relate entirely to your company, but it’s a start. For the best budgeting advice, consider turning to a professional.
2. Overestimating Your Profitability Timeline
We understand that you’re eager. Starting a new company is an exciting endeavor, and your passion shines through. But that passion may act as rose-colored glasses.
People might not bite at your new business right away. According to the Chamber of Commerce, 40% of small businesses turn a profit while 30% break even.
So, don’t let your optimism skew your budgeting plans. Earning money in that first year is tough. If you’re not prepared to miss out on profitability, you’ll have immediate cash flow issues. Set a realistic timeline and ensure you have enough funds to hold you over until things look up.
3. Not Collecting Receivables on Time
It’s an incredible feeling when the services or goods you offer see sales. You may even think: this is it! I have customers!
Not so fast. You have to make sure you’re getting paid on time.
Customers who are slow to pay put you in a tight spot. If you’re not collecting receivables on a schedule, you’ll start seeing cash flow issues left and right. When money isn’t flowing in as it should, it can stifle business growth. Plus, you could even run into problems in terms of paying off business expenses on time.
Create a stringent receivables process and only offer credit to customers with solid payment history. Something as simple as ensuring on-time payments will position you well to thwart cash flow problems in the future.
Avoid These Mistakes and Set Your Company up for Success
For your business to survive, you need to nurture your cash flow. Be proactive by setting a realistic start-up budget, creating a reasonable profitability timeline, and ensuring customers pay you on time.
For further help with start-up strategies and financial advice, consider reaching out to a small business consultant.
