The 4 Most Common Cash Flow Mistakes Entrepreneurs Make

All entrepreneurs launch their businesses confident in their products and teams, and with high hopes of future success. All-too-often, however, these hopes are dashed on the rocks of hard financial reality: of all small businesses started in 2014, only 56% were still operating as of 2018. In almost all of these cases, the problem came down, in one way or another, to cash flow.

If you want to ensure that your company meets with success in the coming years, here are four of the most common cash flow mistakes entrepreneurs make, and some of the ways you can avoid them. 

1. Insufficient Financial Cushion

As a business owner, you never know when costly setbacks will occur. Even if you have been conscientious and assiduous in your own business practices, natural disasters and macroeconomic trends are still going to be beyond your control. That is why it is important to keep a large financial cushion in place, so that if you do face sudden losses, you won’t be wiped out entirely.

2. Not Securing Sufficient Funding

Every entrepreneur needs funding to launch their business, and while most astute businesspeople try to be as aggressive as possible in the initial phases of fundraising, even a successful campaign to bring on investors and secure financing may not be enough to cover all of your immediate needs.

If you haven’t secured enough funding, it is imperative that you adjust your expectations and business plan accordingly. Alternatively, you can make up the shortfall by finding an alternative funder helping new small businesses with cash flow problems through specialized financing mechanisms.

3. Overestimating Future Revenue

We all like to be optimistic about the future, but optimism isn’t always helpful when you’re making financial projections. Creating an overly rosy picture of what kind of sales numbers you’ll do in the next quarter can lead you to seriously misjudge how much money you actually have to work with.

This can lead to distorted budgets, overspending, and can even cause you to slip into the red if you aren’t careful about ensuring that reduced revenues are compensated for through reducing expenditures.  

4. Unnecessary Spending

Finally, you need to make sure that all expenses are accounted for and necessary. Small amounts of money add up, and while coming down hard on your employees about this like paper usage and break room stocks can seem overblown, if every dollar you save on supplies and common expenses gets put back into the company, it can make a significant difference over the long term.

If your sales, production, accounting, and customer service departments are the organs that make up your company’s body, then cash is the blood running through its veins. Problems with cash flow can seriously impede your ability to operate, and can even damage your business.

For this reason, all entrepreneurs need to have detailed, regularly updated cash flow plans that will help them make informed and responsible decisions and avoid common mistakes like overestimating sales or not keeping a large enough financial cushion.