If you are starting a brand new business and you don’t have any kind of budgeting software or financial performance analysis tools, you better be a human calculator with a photographic memory. Between 2013 and 2014, over five percent of surveyed businesses ceased operating because of inadequate cash flow. In fact, as many as 25% of businesses fail within their first year, 36% fail after their second year, and by the end of their fourth year in business, 50% of businesses have failed.
Financial data analysis isn’t easy without the proper tools. Can you calculate current assets, compute profit margin ratio, and conduct business valuation by hand? Probably not.
Here are some of the worst cash-flow mistakes a small business owner can make:
- Overestimating future sales: Too many business owners overlook past data and market trends, riding along on intuition and pure optimism alone. You may be smart, but you’re not a psychic. You need to be able to accurately calculate the value of your company and predict your profit margin in order to run a successful business. By applying quantitative forecasting methods, you can use past revenue data from other businesses in your industry as a foundation for tracking trends and anticipating future sales.
- Spending recklessly: They say “it takes money to make money,” and while this is often true, there is certainly a limit. Budget planning is essential. Make sure you are spending your resources on expenses that will benefit your company’s profitability. It is not always easy to see, which is why a budgeting software can be so useful.
- Being too laid-back about past-due receivables: You must keep track of unpaid invoices. Not only that, but you also need to be proactive about collecting these payments. Don’t let your clients take advantage of you. If you rack up too many unpaid invoices, you are bound to experience a serious lack of cash flow.
- Not keeping backup cash on hand: You never know what could happen. If your business has a zero account balance, one month of slow sales could mean instant disaster. Make sure you always have an account balance of at least two months of operating expenses so that if you do experience sudden cash flow obstacles, you have reserves in place to support yourself until you are back on track.
If you have not yet invested in financial software, do so immediately. It could mean the difference between a booming business and an epic financial fail.