Pitfalls to watch out for when managing cash flow
We’ve explored why no business can afford to ignore its cash flow, but even cash flow savvy businesses can fall foul to some common pitfalls.
In this blog, we’re sharing our top 10 pitfalls to look out for and help you better manage your cash flow;
1. Confusing profit and revenue
The sales may be coming in, but revenue is just one ingredient of your profitability as a business. Without the ability to pay your suppliers and wages to your employees, you won’t succeed. Remember, top line for vanity, bottom line for sanity!
2. Not being on top of receivables
Make sure you are on top of the relationship between your sales and your income. Set reminders if you need to and be proactive in collecting your receivables, invoicing on time and setting up processes that make it easy for your customers to pay. There are lots of financial management tools that can help. You can also work with an invoice finance provider like Hydr to remove the burden of waiting out the payment terms or, worse still, chasing your customers for late payment.
3. Cost Per Acquisition (CPA) is too high
If your CPA that is greater than the profit that customer will generate during the time they are with you, you are effectively buying their business. This will quickly catch up with your cash flow and hammer your profits. Keep an eye on it and optimise the channels and strategies that convert your customers at as low a CPA as possible
4. Overspending/excessive overheads
Even with a recent injection of funds, try not to spend overspend on non-essentials, especially if you don’t have much of a cash buffer. Overspending and excessive overheads are a sure-fire way to evaporate that hard-earned cash!
5. Poor pricing
This is effectively underselling your products/services because you haven’t worked out the true unit economics of what it is that you do. Ensuring you make a margin on every transaction is critical to any business.
6. Late payments
Late payments are one of the primary causes of cash flow problems for businesses. In fact, according to the Federation of Small Businesses, the sum of late payments due across the UK rose a shocking 80% to £23.4bn at the end of last year. If customers are paying late or your having to wait for 30, 60 or even 90 days to get paid is causing cash flow problems, invoice finance could well be the answer… and Hydr can help! Book a demo with us today.
7. No cash reserve for the unexpected
Remember to always expect the unexpected. You can almost guarantee that rainy days will come at some stage in your company’s lifetime. It’s prudent to keep a cash reserve so you can manage through those unwelcome surprises.
8. Poor financial planning
That VAT return is always a bit of a shock, isn’t it?! Don’t ignore the importance of financial planning. Bake it into your DNA, have a good accountant that you trust and utilise the many online financial planning tools that are available to make your life easier.
9. Not having a long-term outlook
You need to have a good understanding of your company’s past and present cash inflows and outflows to help anticipate and forecast future cash flow peaks and troughs, and then manage them effectively before those troughs get too deep. It will take time and effort to do this, but it will be well worth your investment in the long run.
10. Borrowing more money/relying too much on external funding
If you have a shortage of cash it is a reasonable response to borrow more money. However, the reality is that while loans can be a solution, they are very often not the best solution for improving your cash flow.
Consider invoice finance instead. Our proprietary digital platform enables businesses to activate the assets already on their balance sheet by transforming those funds cash tied up in invoices that have been issued but have yet to be paid, into cash that is working for you.