Cash flow is the lifeblood of every small business. Without it, you can’t operate and sustain your company in the long run. This article will discuss five common mistakes that small businesses make with their cash flow and how they can avoid those pitfalls.
1. Not Balancing Short-Term and Long-Term Expenses
This mistake often leads to financial trouble for many small businesses because they don’t have enough money saved up in the event of an emergency. It’s recommendable to save at least 25% of your revenue every month so that you are prepared for any eventuality. Ask yourself if you are saving enough money to sustain your business for the next three months. If not, try cutting back on some of your expenses or look for other ways to generate more revenue.
2. Poor Inventory Management
Keeping your inventory levels too high or too low can have adverse effects on the cash flow of your business. On the one hand, having an excess amount of products may lead to wasted money because you may not be able to sell all of them. On the other hand, not having enough inventory (for example, if your products are selling out quickly) may lead to a loss of revenue and unsatisfied demand. The right balance is somewhere in between those two scenarios. Try, for example, keeping about six months’ worth of stock and adjusting your inventory levels accordingly.
3. Making Poor Purchasing Decisions
Another mistake that many small businesses make is to overspend on purchasing decisions. Many business owners tend to go for the most expensive products or services without thinking twice; they believe it will ensure quality and greater productivity in the long run, but this isn’t always the case. Instead of spending more money than you can afford, look for cheaper alternatives that will still serve your purposes. For example, if you need to lease a warehouse but don’t have enough cash flow in the bank right now, maybe it’s better to rent one temporarily and save up until the time is right.
4. Ignoring Tax Implications
It’s crucial to ensure that you know the tax implications of all your business decisions. If you don’t, it will be difficult for you to determine whether or not something is beneficial in terms of revenue generation and cost reduction. On the warehouse example, for instance, it’s imperative to calculate the tax deductions you may receive if you rent a warehouse instead of buying one. You have to consider the depreciation value, insurance costs, and other expenses that will be affected by your decision.
5. Missing Out On Opportunities To Get Better Rates
The final mistake that small businesses make is to miss out on opportunities to get better rates. For example, many small businesses utilize credit cards for business transactions, and your business might be one of them. In that case, it’s essential to take advantage of any promotional offers or cashback bonuses they may offer so that you can reduce your monthly expenses and save money in the long run. You might also want to look beyond banks to see if other institutions such as FINTECH (financial technology) firms can provide you with better rates. New York-based SOS Capital, for instance, can offer low-rate Term Loans and MCA’s to businesses that need a cash injection within 24 hours.
