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Four Cash Flow Mistakes That Can Make or Break Your Small Business

July 8, 2019

Small business owners are committed, driven and focused but are often time-constrained with an overload of day-to-day operations, allowing little time for managing cash flow.  However, not managing your company’s funds might lead to your company’s demise.

Even if your company is an overnight success, it’s good to keep in mind that approximately 80% of businesses fail because they are not able to manage their cash flow.

There are certain unplanned costs or expenses that can have an adverse impact on the cash flow, and since they aren’t anticipated, they’re tough to manage.  Here are four of the cash flow mistakes that can hurt your business.

1. Forced Growth

If you’re running ads, either digital, print or social media, and you get good returns on your investment, don’t make the mistake of increasing your ad spend by five times anticipating 5x  growth in sales.  You may generate more leads but not in proportion to the advertising spend. You may end up spending more than you make that month, impacting your cash flow.

Forced growth sounds good but additional sales might require higher salary expense, a bigger office for accommodating more people and clients, a rollout of new products, a higher than needed ad spend that brings in more revenues, but with the revenue comes more cash outflows.

2. Spending Too Much on Sales

As a small business, it’s easy to fall into the trap of spending too much money to make money.  You can avoid this by monitoring two metrics.  One is the acquisition cost of the customer, which is the amount spent on gaining one customer. The other is the lifetime value of the customer, which is the total revenue generated by a customer over his or her lifespan.  Overspending on the acquisition cost might lead to gaining a small customer with a very limited return.  Many business owners believe that more customers mean more profit. Think long-term value.

Don’t forget the following in calculating new customer acquisition: salary and benefits of the sales person, amount spent on mobile and internet connection, cost of a seat in the office, commissions, and sales support. If you don’t understand your acquisition costs, you may unknowingly burn more than you earn – and this ultimately will negatively affect your cash flow.

3. Ignoring Seasonal Nature of the Business

Seasonality is applicable for some businesses. The businesses owners may find themselves cash-rich during their peak season but may face difficulty in managing daily cash outflows on the off-season.

When the cash-rich season begins, it leads to overhead commitments that may be difficult to maintain during the off-season. And, if a business promotes off-season discounts and offers, it reduces margins for the sake of maintaining sales.

Plan accordingly.  Build up savings to cover your overhead in off seasons in cash-rich seasons,.

4. Improper Management of Tax Obligations

Benjamin Franklin said, “In this world, nothing can be said to be certain, except death and taxes.” Taxes are statutory obligations and have to be paid whenever due. If you miss the deadlines, it will result in penalties and interest payments that can strain cash flow. Tax liabilities should be accounted for in a business’s financial plan.

Seek the help of tax expert to identify potential tax liability.  The liability will depend on the growth plan of the company.

If you’re a small business owner looking for assistance with cash flow, contact the experts at First Bank of the Palm Beaches!