According to the Office for National Statistics 357,000 businesses closed their doors in the UK in 2017. Some of those businesses were less than a year old.
There aren’t any statistics that reveal the precise reasons why these businesses failed, but often the answer is as simple as cash flow.
Cash Flow Mistakes for New Business Owners to Avoid
A lack of cash to pay suppliers or staff can quickly bring the demise of even profitable businesses. But by learning from others’ mistakes, you can help ensure your business doesn’t suffer the same plight so let’s look at five of the most common cash flow mistakes that entrepreneurs make.
1. Incorrectly predicting future sales
When you start a business, you are sure to be excited about the prospect of being hugely successful, and whilst being optimistic is good, this excitement often leads newbie business owners to overestimate their future sales.
By incorrectly predicting your future sales, you set yourself up for some nasty surprises, especially if you use cash flow to buy stock to support these predictions.
It is notoriously difficult for startups to make an accurate sales forecast but if you are starting up a new business, make sure that you are as realistic as possible in terms of future sales predictions. This enables you to safeguard yourself from making poor financial decisions from the outset of your business.
2. Spending money on forced growth
Many new business owners have suffered the cost of trying to force growth. What is forced growth? It’s when a business owner tries to spend money in hopes of forcing immediate sales growth.
Take for instance paid advertising. When you first start advertising your business, you might find that paid adverts on social media and Google are rewarding. Because of this, you may think that increasing your advertising spend by ten times will earn you ten times more sales, but it doesn’t.
In most instances, sales will happen, but not in proportion to the amount of extra money spent – which results in a loss for the business.
It’s important to let your business grow slowly and steadily. If you try to up the ante too quickly, you might spend more than you make in return. And a poor return on investment is a top reason why so many new UK businesses run out of money and must shut down.
3. Not having any cash in reserve
Having profits available is a good thing, but not if it is mismanaged. Many entrepreneurs end up spending their cash flow too quickly. This results in entrepreneurs finding themselves stuck, especially when emergencies strike or when sales take a dip.
It’s a good idea to let your cash flow and profits grow slowly and steadily without tinkering with it too much.
If you want to grow a certain aspect of your business or work on a project that is going to deplete all your available cash flow, it is a better idea to consider a business loan so that your cash flow is unaffected.
4. Being slack with collecting payments
Nothing is more important to a new and growing business than collecting the revenue that it is owed. According to a report by Credit Safe, total UK bad debst filed in the first 3 months of 2018 in came in at a whopping £738.7 million – a year on year increase of over 360%.
Writing off bad debt means that trying to collect that payment has simply taken too long (and been unsuccessful) and so the business is making the assunption that it will not be paid.
If you send out invoices and wait for payment from customers, don’t slack on collecting when the due date arrives. If you delay collecting payments from your customers, it may eventually impact on your ability to pay suppliers and staff members.
If you aren’t too keen on calling people up and demanding payment, consider hiring a professional service that can take over this function and ensure that payment is collected on time.
Keep in mind that such services cost a small handling fee which can often be negotiated. Another alternative is to require immediate or even upfront payment for services and products.
5. Failing to create a cash flow budget
It’s easy to overspend when you don’t have a budget to stick to. It’s much the same with a business. If you don’t create a cash flow budget that you follow, you could find yourself spending too much of your cash flow and eventually crippling your business.
A budget helps to keep spending on track, but it does more than that too. It also instils a valuable sense of financial discipline – allowing you to see which areas you are overspending in and helping you to cut back where you need to.
Producing a cash flow forecast for your startup helps you to see when you might have a cash flow squeeze – giving you time to plan ahead and make a contingency plan. Forecasting ahead will help you make sure that a small cash flow problem doesn’t spiral out of control and become a terminal issue.
Cash flow is so important for new businesses. By taking notes from these tips you can learn from the mistakes of other business owners who have gone before you and with the right approach to your cash flow, you can prevent your business from closing before it has had time to bring in profit.
About the author
This guide has been written exclusively for ByteStart by business finance specialists SME Loans.
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