EA - Business Owners - Avoid These Common Cash Pitfalls

Business Owners: Avoid These Common Cash Pitfalls

Cash flow matters at all stages of business ownership. Whether you are trying to get a new business venture off the ground, or you’ve been in business for years, it is common to rush into cash pitfalls that can drain your bank account. But these problems can be avoided if you are proactive with your financial system.

A good accounting and bookkeeping team, such as Easier Accounting, can offer the ongoing cash flow support that you need throughout the year. Our team has worked with many small businesses, and we’ve seen the trends that often happen within growing companies. This experience gives us the insight to help our clients sidestep some of the common issues that impact cash flow.

Why Cash Flow Matters

It seems obvious that you need money on the bank to keep your business running. But there are times when you know that the money will be coming through receivables, so it might seem like a good idea to tap into credit if you have immediate expenses that need to be covered. This short-term strategy can lead to a domino-effect of financial issues in the future, especially if you don’t have a good bookkeeping and accounting system in place.

Not only do you need to be looking at the money that comes into your business when customers buy your products and services, but you also need to be looking ahead to the future to see how much money needs to be spent on expenses. For example, a big tax bill can sneak up on you if you aren’t tracking the flow of money, causing you to be cash-poor and unable to keep up with the costs of running your business.

When the bills need to be paid, and you don’t have any money in the bank, the cash flow issues could potentially result in business failure. Rent needs to be covered, employee paychecks need to be paid, inventory needs to be restocked, and you have a long list of other expenses that are required to keep your company running. Make sure that you have enough cash in the bank to cover these expenses each month.

Common Cash Pitfalls

Learning about common cash pitfalls can be an effective way to bring awareness to your business practices, helping you avoid these issues. You can learn from the mistakes of other business owners so that you don’t have to walk the same difficult path of cashflow problems.

Our team at Easier Accounting is here to guide your financial decisions and help you avoid some of the problems that we’ve seen over the years. Here are some of the most common cash pitfalls that we’ve encountered:

  • DIY Accounting: When a business owner chooses a DIY approach for accounting and bookkeeping, they are usually motivated to save the money that would have been spent on accounting services. The truth is that taking on these financial responsibilities might be one of the costliest mistakes you can make as a business owner. Not only are important financial details often overlooked with DIY accounting, but you don’t have the experience to dig into the financial statements and see what is coming in the future. You need clear insights for your expenses and income so you can optimize your business practices, which in turn will help to boost your profit margins.
  • Using the Right Tools: Excel can be a great tool for many projects within your company, but you are making a huge mistake if you are still using a spreadsheet to track your income and expenses. It is important that you have a robust accounting software that can generate reports and help you see a clear picture of your business profits and losses. The right accounting software will help you avoid mistakes that often come when the numbers are calculated manually.
  • Training and Application of Accounting Software: Not only do you need to be using the right accounting software to match the needs of your company, but it is also important to be sure that your team is trained on the most effective strategies for the use of this software. The simplest way to be sure that you are leveraging the full power of a financial software is to hire an experienced accounting team to assist with the setup and ongoing maintenance of your system.
  • Overlooking Accounts Receivables: Having unpaid invoices for current sales can inflate your numbers, but don’t count on the income until you have money in the bank. Too often, small business owners have a gap in their accounts receivables system. Make sure you have a strategy in place to follow-up on outstanding invoices. Late or unpaid invoices can have a major impact on your cashflow.
  • No Rainy-Day Account: Don’t make the mistake of spending every penny that comes into your business bank account. There are always opportunities to spend money on marketing and business development. While these expenses are good investments, it can be harmful to your company if you don’t have money set aside for a rainy day. It is common for small businesses to have slow seasons, which means that you need to have enough cash on hand to cover the costs when sales are trickling through. Set up a savings account designed for emergencies only. Ideally, this fund should have a minimum of three months of expenses.
  • Too Much Spending: It doesn’t matter how much money you are bringing in, you won’t be able to make a profit if you are spending more you are collecting. Often, businesses get bogged down with unnecessary subscriptions and services that eat into the cash flow and profitability each month. Take time to discuss your expenses with a financial pro, such as an experienced accountant. Find line-items where you can cut costs to protect your cash flow. Remember that a little bit can add up… saving $100 per month results in $1,200 in savings each year.
  • Excess Inventory: It is important to be sure that you have product on hand when the customers are ready to buy. But holding onto too much inventory can tie up your cash and make it difficult to keep up with ongoing expenses. If you have a warehouse stocked with products, then you need to dial in the sales trends and fine-tune your ordering. The goal is to have stock on hand for the shortest amount of time before it is sold. Your inventory can be managed by evaluating sales volumes, forecasts, supplier turnaround time, and available cash on hand. Have a system that takes care of ongoing inventory monitoring so you can reorder when needed, helping you avoid the loss of clients if something is out of stock.
  • Realistic Future Forecasting: While you are working to create opportunities for business growth, don’t bank on the money until the sales have actually occurred. One of the common cash pitfalls that we see is when business owners spend money now, assuming that they will have the necessary income needed in the future. You shouldn’t count on a sudden boom in your business in the future. The best solution is to evaluate your business records and data so you can see the trends that are normal for your industry.
  • Large Debt Burdens: Too much business debt can eat away at your profit margins because of the cash flow that is tied up in interest costs. Look for ways that you can manage your cash flow to pay off debt. Lowering these balances can reduce the amount of money that you are paying for late fees, overdraft costs, and interest expenses.

The Simplest Way to Avoid Cash Flow Problems

We’ve found that the most common reason business owners encounter cash flow problems is because they don’t have effective systems in place. It is important that you know the current cash position of your company, as well as upcoming expenses that will need to be paid. If you are just going with the flow and hoping that the money will be there at the right time, then it is likely that you will encounter big problems in the future!

As a business owner, you don’t need to take accounting classes or spend hours on YouTube watching accounting tutorials. The fastest and most effective solution to ensure that you are managing your financial reports and cash flow is to tap into the services offered by an experienced accounting team.

At Easier Accounting, our goal is to reduce your stress by creating a financial system that helps your business succeed. We offer years of experience in the industry. You can tap into our expertise and insights to find the right solutions that will support your long-term financial needs. We want to help your business with financial strategy, and we have proven experience that can be used to optimize your financial systems.

If you are interested in more information about business accounting systems, then we invite you to contact our team right away. Easier Accounting is here to answer your questions and help you find the right solutions to meet the unique needs of your business. We’ll explain the available services so you can see the benefits available for your company: (888) 620-0770.

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