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Cash Flow Management: Myths, Misconceptions and Mistakes

A good forecast should never be taken for granted, or assumed as “money in the bank” until it all actually happens. The biggest mistake we see small business owners make is getting too comfortable, or too excited. Feeling rich and fat, they begin spending too much on their lifestyle, toys, vacations – or a foolish expansion or new business too quickly.
Baron Christopher Hanson
RedBaron Consulting

MYTH

A Profitable Business is a Successful Business

It’s convenient to reduce the definition of financial success to terms like assets and liabilities, or profit and loss. But one look at your cash flow statement will tell you how your business is doing. Consider a high-profit, low-cash flow situation. Your company may be selling its products or providing services at a higher price than your costs. Clients who buy wholesale, or hire your services on long-term contracts, usually pay their invoices only 120 days or so from receiving goods or services. If, during this time, a manufacturer demands payment on the goods they supplied, your profits can’t help you out.

Even with significant earnings per unit, you will still end up with a few lean months when you struggle to make payments. This sends your company into an under-served, untimely bankrupt situation. Consider another scenario, where you’ve got all bill payments under control. If you previously borrowed to take care of a fund shortage a couple of months ago, this can cause your per-unit cost to rise above the break-even point. At this point, factors like an increase in production volume can cut into profits. Negative cash flow stunts your growth even in an ideal market where demand outweighs supply.

MYTH

Your Bookkeeper’s Financial Reports do not Require a Review

Often, small business owners don’t question the data their bookkeepers give them. You might avoid learning the basics of bookkeeping because you
think it will eat into your time running the business. or, you’re worried about insulting their work. It is crucial that you understand the numbers in
your bookkeeper’s financial records, whether they are in-house or outsourced. There is nothing wrong with looking into the numbers, and asking questions—it keeps your bookkeeper honest, and on their toes.

MISTAKE

Making Unrealistic Sales Forecasts

While you can’t run a Small to Medium Enterprise (SME) without a healthy dose of self-belief and optimism, you’d do well to leave it at the door when you forecast sales targets.

In the context of cash flow, forecasting unrealistically high sales results can tempt you to create huge expenses. If the sales don’t pan out as expected, you end up with a cash shortfall. Ground your sales forecasts firmly in reality, using tools like a properly executed cash flow statement, income statements, and your balance sheet. By studying cash flow statements for a series of years, you can predict the ups and downs in your sales cycle.

Avoiding Mistakes and Taking Charge of your Cash Flow

It is common to make cash flow mistakes as a business owner. However, if you are consistently managing your business’ cash flow is at you can bounce back from mistakes. To learn more about common cash flow myths and mistakes, download our Guide to Cash Flow Management!

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