Cash is King.
Being a small business owner, having enough cash is really important while cash flow is paramount. If you want to stay in business and be successful, cash is one of the areas you must remain laser focused. Many small business owners focus on sales, which is good, but if you don't collect the cash from those sales, you may quickly go out of business.
I'm going to share the four cash flow management mistakes that may cause your small businesses to fail and why you must avoid them.
1. Poor due diligence on accounts receivable
In other words, poor credit granting procedures. If you give credit to people without doing the proper due diligence, collecting on those receivables may become a big problem. Imagine getting a mortgage and the mortgage company doesn’t check your credit history and credit report – that’s similar to not evaluating the credit histories of the customers you offer credit. There are several services that can provide this service for you as well as check your customers’ Dun and Bradstreet report. Not doing your due diligence is a huge problem to the success of your business, especially if you plan to offer credit to your customers.
2. Not negotiating with your creditors
Speak with your vendors about opportunities for different terms and pricing based on your credit history before purchasing products from them. Some small business owners may not be used to negotiating the terms of purchase but if you don’t ask you will never know. Depending on the size of what you're buying, you may have flexibility in negotiating when you pay them back, how you pay them back, and a lower interest rate associated with paying them back. For example, there are a lot of situations where small businesses will buy inventory up front and not realize that they had the opportunity to pay later - therefore restricting cash on hand and less cash flow to manage operations.
3. Buying inventory too soon
Buying too much inventory before you have a proven sales channel is a waste of cash. If you buy too much inventory hoping you'll sell the products without knowing exactly how is one of the biggest problems small businesses face. If your product is susceptible to seasonality, changes in market sentiment or consumer behavior, you are running the risk of having tremendous amounts of inventory with no ability to sell them.
4. Not collecting on your accounts receivable
As a small business owner, asking your customers to pay you on a timely basis may be difficult. In my experience, when a small business I have worked with in the past has a sizeable number of accounts receivable on their balance sheet, I'll ask them, "How long have your accounts receivable been outstanding and do you have a schedule of collections?” Remember, this is your money and you have to be relentless in collection because you've already performed the services or shipped the product – the cash owed to you is necessary to grow.
As the saying goes “Cash is King!” and without the cash, it becomes extremely difficult to stay in business – let alone grow your business.
About Ebong Eka
Ebong Eka is no stranger to the world of personal finance. As a certified public accountant and former professional basketball player he offers a fresh perspective to small business planning and executing. With over fifteen years of accounting, tax & small business experience with firms like PricewaterhouseCoopers, Deloitte & Touche and CohnReznick, Ebong provides practical money solutions tailored to the everyday person, the aspiring entrepreneur or the small business owner.
Ebong is the founder of EKAnomics, a sales, pricing and leadership firm. He is also the founder of Ericorp Consulting, Inc., a tax and management consulting firm. Ebong is the author of “Start Me Up! The-No-Business-Plan, Business Plan.”
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