One of the most common reasons that small businesses fail is not managing cashflow successfully. Here are five top pitfalls to avoid:
1. Getting carried away when forecasting sales figures
Be ruthlessly realistic. There is a fine balance between ambition and realism so it is not uncommon for business owners to be over optimistic when it comes to forecasting sales and then, later, face a cashflow crunch. So it’s important to regularly reaffirm your underlying assumptions, ask if you’re being objective when considering how much cash will come in and when it will arrive.
2. Overspending during the business start-up phase
There are a lot of expenses to fund, upfront, when most new businesses launch but are they all essential? Will every pound you spend bring in a real benefit? Create a realistic budget and stick to it. Review, anticipate and adjust periodically.
3. Not chasing invoices soon enough
New and existing businesses need to receive cash on time but, unfortunately, collecting the cash they are owed isn’t always top priority. If you delay invoicing and don’t chase late payments then you are likely creating a future cashflow problem.
4. Not building up an emergency fund
All businesses face delays in getting paid and/or unexpectedly large expenses at some time. Try to build up an emergency reserve fund of cash –3 months’ worth of operating costs – as soon as you can so that you have options and do not immediately have to rely on getting an overdraft or loan when a crisis strikes.
5. Not keeping a cashflow forecast
Every business needs to maintain an up-to-date cashflow forecast showing all expenses and income for the next 12 months to understand when it might face cashflow shortages. Otherwise, businesses risk spending cash now that will be needed to pay suppliers or Revenue in the future.
Our easy-to-use cashflow calculator will help you to check your business cashflow.
The information contained in this article is has been prepared by Bank of Ireland UK (“BOIUK”) for information purposes only. BOIUK believes any information contained in the article to be accurate and correct at the time of publishing.