A United States based banking institution recently carried out an empirical study that discovered that at least 80% of the new and growing enterprises experience failure mainly as a result of improper cash flow management. Below are the five most common cash flow mistakes exhibited by many contemporary businesses:
1. Overestimation of the Future Sales Volume
In as much as entrepreneurs are expected to keep high levels of optimism, they must never allow it compromise the corporate objectivity since that might endanger the business cash flow. The truth is that not everybody who window-shops will really buy the items. Whereas the business might realize an increased sales volume during the holiday season, it will not be very realistic for the entrepreneur to expect the sales to double during that period. For this reason, there is need to embark on completing accurate and objective sales forecasting using actual figures and available historical evidence. Through the right application of quantitative forecasting techniques, an entrepreneur is capable of using the actual previous revenue information to track the cash flow trends and even predict the forthcoming sales.
2. Impulse Expenditure in the Startup Stage
Many entrepreneurs normally misunderstand and misuse the say ‘spend money to make money’. In spite of this statement being true in its sense, the creation of startup expenditures cannot be uniform or rather equal. There are many confirmed beneficial expenditures that are involved in business startups. However, there as well exist many service providers, consultants and suppliers who may not mind taking up an enterprise’s startup funds for completely unbeneficial services. An entrepreneur with the intention of progressing financially should as such be vigilant on the bottom line, making a determination of the cost-benefit of all the business expenditures.
3. Having a Passive Response to the Past-due Receivables
The unpaid invoices from the customers contribute significantly to the killing of the cash flow. There are certain business people who are never proactive when it comes to the collection of payments from the customers. This puts the enterprise on the verge of experiencing a seriously unbearable financial as well as cash flow situations.
4. Avoiding the Use of Cash Flow Budget
A cash flow budget is considered very useful in the tracking of daily cash flows of businesses (Brooks, 2015). For example, at some point, a business might require the suppliers to avail more stock as a way of preparing for the expected rise in the sales. Notwithstanding, whenever the payments to the supplier come due prior to the actual occurrence of the sales, then the business might find difficulties with the timely payment of the bills.
5. Ignoring Having a Cushion of Cash On Hand
Cash flow hiccups normally occur to almost every business in spite of the measures put in place for the sake of protecting the business cash. To the entrepreneurs with a cushion of cash on hand, this might not cause any worries. However, for the businesses operating from a zero account balance, just a single period of reduced sales might turn out to be disastrous.