Cash flow refers to the net balance of cash moving into and out of a business at a specific point in time. Cash flow can be positive or negative. It’s the net cash generated to finance the company and may include debt, equity, and dividend payments. A financially healthy small business has money flowing in and out – this signifies that the business is thriving and the flowing action of money is known as cash flow.
Cash flow can be divided into Cash Inflow – revenue or profit made from sales and cash outflow – this is the amount of money spent on your business including money spent on rent, salaries, stock, electricity, taxes and other expenses. The state at which the amount of money going out of the business is more than the amount coming in is among the most significant reasons that Nigerian small businesses face shortfalls.
A cash flow analysis is an important statement in small businesses as it determines your company’s working capital – the amount of money available to run business operations and complete other transactions.
When small business owners are running out of cash or find themselves facing unexpected shortfalls, it’s a sign that they’re not monitoring their cash flow. As you do your best to stay on track, your obligations including payroll and loan payments become harder to meet. Even if you’re a brilliant business owner, you must properly manage your company’s cash flow in order to avoid putting your business at risk. A financial expert with PricewaterhiuseCoopers (PwC) Nigeria, Bola Adigun said 80 percent of Small Businesses Enterprises failed due to cash flow problems.
The good news is that with this article, your business will never have to get that far. There’s no gainsaying that cash flow problems are a major contributors to failure in small businesses, however, prevention is the best medicine when it comes the financial health of your business. By avoiding the following 5 cash-flow mistakes, you can be confident of a long-term success in your start-up.
1. Not Creating a Cash Flow Forecast
A cash flow forecast is an estimate of cash you expect to receive and cash you expect to pay during a period of time. This can also be called a cash flow budget. This budget is more useful than a regular budget in the day-to-day running of your business since it will help you get a handle of your cash position at any point in time. A cash flow forecast helps you to tackle and answer the following questions before they become serious issues:
a.Will you have enough money to pay your bills?
b. When do you expect the bulk of your outstanding receivables to come in?
2. Not Keeping Track of your cash flow
Failure to keep track of how much money comes in and goes out of your small business is poor financial management. When you track your expenses, receivables and negative cash flow, you will have an overview of where your business stands financially and this will eventually help you in making some vital business decisions. In order to run your start-up successfully, you will need to have an idea of your profit and loss statement, incomes and expenses, and how to manage cash flow. You will need to have the real picture in terms of how much money your business will incur monthly and how much expenses you will prepare for. Tracking of your cash flow also enables you to identify your best performing products. Once you can identify the product performing best, the secret to making your business more profitable will be unlocked. Henceforth, you can use this intelligence to streamline your portfolio of offerings to attract more of those profit-generating customers. Additionally, reviewing your cash flow will also help you catch overdue payments from clients.
3. Underestimating Startup Costs
As a small business owner, having a realistic budget in place is essential to help you avoid cash flow related problems right from the start. Obviously, unrealistic estimates and lack of enough working capital will get you started on the wrong foot. Before you start your small business, list all the things you’re going to have to buy, bills you’re going to pay for – installation, your first batch of product, furniture or software, or starting fees for certain services, etc. Then, you account for the next six months to evaluate if you have enough money left after all those expenses to continue operating. If not, you need to re-evaluate your financial plan and if possible, have the double of the amount of capital you’ll likely need to stay in business.
4. Spending too much
It’s too easy to spend too much money upfront when starting out in business. It is recommended that small business owners in Nigeria should to keep overhead and operating expenses in the beginning as low as possible. Before committing to any major purchases or leases, identify every area of the business that costs money ranging from office space to stock purchase and employees’ salaries. In your small business, ensure that you separate out “needs” from “wants”. It’s human nature to desire the latest gadgets and luxury equipment to impress your clients and peers. Remember that these luxury equipment and cutting-edge technology won’t save your business if it’s down financially. Stay practical by starting with basic essential needs. The objective of every business is to generate profit and not to purchase expensive sets of equipment that will add more debt than necessary.
5. Not Proactive about Collecting Receivables
It is true that you your business will be successful if you make sales, but if you’re passive about pass due receivables, you may lack the money you need to continue to move your business forward. You could be on the verge of being in an unhealthy cash-flow situation if you aren’t being proactive about collecting payments from your clients or customers. Cash flow problems as a result of slow receivables collection can make it difficult to pay your bills on time particularly for small B2B businesses while consistent review of accounts receivable will keep your cash flow steady. Immediate steps should be taken to facilitate collection of receivables if payments are falling behind.
In order to prevent this dangerous business situation, there are certain policies that you can implement as a small business owner:
a. For service based companies, good policies include imposing a 5 percent late penalty after five working days and work stoppage after 30 days.
b. Creation of an internal timeline of procedures for when payment reminders will be sent and when you’ll make collections phone calls or cut off services if past invoices aren’t paid.
c. Incentivization of clients or customers through discounts for early payments.
Cash-flow problems are one of the greatest challenges faced by small business owners in Nigeria. However, if start-up business owners in Nigeria stay objective about their businesses, keep track of their cash flows, avoid unnecessary spending, and stay alert to potential pitfalls they will be heading towards long-term business success.