One of the most common reasons that small businesses fail is that they do not manage their cashflow successfully. Here are the five top mistakes to avoid.
1. Getting carried away when forecasting sales figures
Be ruthlessly realistic. It’s 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 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 euro you spend bring in a real benefit? Create a realistic budget and stick to it.
3. Not chasing invoices soon enough
New 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 setting up 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 do not 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.
This 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 (“BOI”) for information purposes only. BOI believes any information contained in the article to be accurate and correct at the time of publishing.