Cash flow management is a process of monitoring, analyzing, and optimizing the net amount of cash receipts minus cash expenses. For the financial health of a business what is important is the net cash flow measurement. This is an important factor for any business, as much as 80% of businesses fail because of poor cash flow management. If you see that your business is constantly spending more than it earns, then it is clear that you have a cash flow management problem.
Here are the most common cash flow management mistakes that can kill your business.
1. Forced Growth
Sometimes it is good for a company to have a good growth story, but often the excessive growth can cause harm to the company. So what is forced growth? Sometimes it is a bigger office to accommodate more people, or sometimes a rollout of new products, or more than needed AD spend. Forced growth is anything that would call for increased expenses. Such tasks are effort-oriented and can severely affect day-to-day operations. In such times, you must efficiently estimate these cash outages so that you can be prepared for any other urgency.
2. Spending too much on sales
For any small business to grow, it is certainly important to fetch new customers, sometimes even at the cost of incurring losses. But what is important here is that you need to identify whether the customer will bring you the profit that you had estimated. The two factors here are ‘Acquisition Cost’ and ‘Lifetime Value’.
Acquisition Cost – This is the cost spent on getting one customer.
Lifetime Value – This is the total revenue the customer generates in its lifespan.
Clearly, if you spend more on the acquisition cost, you are going to incur a loss. Because at the end of the day, it will be a small customer and will give you a very limited return. To avoid this, you need to focus on other aspects and not just one thing.
3. Ignoring the Seasonal Nature of the Business
For the businesses that do not have yearlong operations, it so happens that they find themselves cash-rich during the peak seasons of business and for the remaining period face difficulty in managing the cash outflow. So when the cash-rich season begins, people tend to make overhead commitments that become difficult to handle during the off-seasons.
To avoid this poor cash flow management, you need to make sure that there are enough provisions for the off-seasons in the financial plan.
4. The Improper Management of Taxes
What are taxes? On a funny note, they are the fine we pay for doing well. Otherwise, they are statutory obligations that are compulsory in nature and have to be paid mandatorily. You like it or not, there is no choice. Also, it has to be paid whenever it is due. Sudden changes in the taxes or other defaults from the taxpayer can affect the cash outflow.
So taxes have to be accounted for and proper calculations must be made for it in the financial plan. Thus it is always necessary to plan for any of such uncertainties. After all, a bird in the hand is worth two in the bush! Concluding, these are some of the cash flow management mistakes that can lead to losses in the business.
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