Forecasting cash flow is an essential business practice, but it's important to note that there are right ways to do this and wrong ways to do it.
If you are working on your cash flow planning for the first time, it can be a wise move to get someone with accounting experience to look over it to make sure you're avoiding these common cash flow mistakes.
One of the key benefits of a cash flow strategy is knowing how much you can safely spend without running into problems.
In some cases, such as new equipment, the money you spend is really an investment so the money you put in should be returned (and hopefully grown) in sales. However, without careful planning, it's easy to go wrong.
Spending money without considering the consequences can damage your finances and cause irreparable problems.
Ignoring seasonal factors
While not all businesses are affected by seasonal factors, many are -- and not always in the same way.
Christmas time is one of the major considerations. For many shops, this is by far the busiest time of the year. Increased sales are great, but you also need to consider staffing levels and how much stock you need to order.
On the flip side, for many office-based businesses, things tend to get a lot quieter over Christmas and the new year, with many offices even closing for a few weeks to account for this.
For many new businesses, these cycles can catch them off guard but it's important to learn from your mistakes and plan accordingly in future years.
Being too quick to think you're successful
There are two ways this can happen, but both can be problematic.
Many business owners are quick to celebrate initial success and can jump the gun when they decide they're turning a profit. It may be that they're counting revenue before payments have been collected or it may be that they're forgetting that they'll have to pay tax on their income, but either way, you should make sure not to count your chickens before they've hatched.
Not charging enough for sales or services
Many small businesses don't charge enough for their services, especially when you factor in how much you have to pay for each sale.
By undercharging for your work, you're losing out on money every time you make a sale or get a new client which, in the long run, ends up costing you a lot of money.
Not having a cash flow strategy
The most common mistake that businesses in Newcastle and the rest of Australia have is that they don't have a cash flow strategy at all.
Without regular planning and forecasting, business owners lack the information they need to make big decisions about their work and direction.
If you're not sure where to start with your strategy, give Active Accounting Group a call on (02) 4044 1245 to book your Free Cash Flow Consultation. We'll be able to get you on the right path and help you make your business more efficient and build your confidence in cash flow management.