4 Cash Flow Management Myths That Are Holding You Back
Cash-flow management is key to any successful business. You need to earn more money than you spend each month to grow your cash. Seems simple enough, right?
But cash flow can be trickier than it seems and, if not managed properly, can land business owners in trouble without them knowing it.
We've taken a look at the top cash-flow management myths that could be holding you back.
Myth 1: More Sales Will Lead to More Cash
More sales does not always lead to more cash. Remember, every new project means buying supplies, paying your staff, covering expenses for travel and overhead, etc. If your expenses are going up faster than your profits, you could be losing money despite growing your business. Even worse, you will not be available when a more profitable job comes your way.
Before agreeing to a new project, take time to evaluate whether there is enough of a profit margin for it to make sense. Otherwise, you could be wasting valuable time and putting your business in a worse financial position.
Myth 2: If You're Profitable, Cash Flow Takes Care Of Itself
If you're earning a profit, in theory you should be building cash. But sometimes there's a delay between when you finish a project and when the customer actually pays you. If there's too much delay, a profitable business can still run into cash-flow problems.
While you're waiting, you might not have enough cash in your account to pay major expenses, like salaries or your lease. Then, you could be charged a late payment penalty, upset your employees or be forced to turn to high-cost loans to make up the difference.
Making a profit should be your focus but keep an eye on your cash flow. If your cash balance starts dropping, hold off on new purchases until your profits turn into actual cash. You should also consider changing your payment terms so your clients pay you more quickly.
Myth 3: Money in the Bank Means Your Cash-Flow Plan Is Fine
Money in the bank does not always mean you have strong cash flow. Where did that money come from? If it's from a bank loan or investors and you aren't generating cash from your business, eventually you're going to burn through your reserves.
You should be focused on whether your business cash flow is positive or negative each month, not whether you have cash right now.
Myth 4: Cash-Flow Management Is Your Accountant's Job
Your accountant is there to help manage your books including cash flow; that much is true. But ultimately, it's your day-to-day business decisions that determine your cash flow.
You should have an idea whether your cash is growing or shrinking so you can decide whether to hold off on buying new equipment, can afford to give employees a raise, need to change payment terms so customers pay more quickly, etc. If you're making business decisions that hurt cash flow, your accountant won't be able to fix it.
Consider your cash flow plan as your doorway to success — if you can stay on top of it, it will pay off in the end.