7 ways to avoid fatal financial mistakes

Cash flow is one of the major causes of new business failure – so how do you avoid the mistakes many small businesses make?

While we love money in the bank account (who doesn’t), the first thing to consider is that cash flow isn’t just about getting paid.

Cash flow is understanding when money does come in, what you’re doing with it and your processes to manage these transactions.

Here are our top seven tips we give our clients to help build confidence around cash flow and to avoid fatal financial mistakes.

1. Set terms upfront

Have engagement letters, contracts, signed quotes, terms of service and payment expectations in place with your customers or clients, before the work is started.

Investing time (and money) on these systems will ensure you can predict future cash flow for the time frames of the projects/work.

2. Get the money upfront

In this day and age, accepting payment up front or accepting a deposit amount is really quite normal.

Do you go to a hairdresser and pay for the service 30 days later? Heck no.

Payment up front or via instalments is normal. Get used to it, get used to talking about it, get used to asking for it and get used to invoicing that way.

Upfront and deposit arrangements enable you to get money coming in to start working on the project and not be left high and dry with out of pocket expenses.

3. Be proactive

Be proactive and plug those financial leaks as soon as you see a trickle escaping from your ship.

When you find a leak, you not only plug the leak, but you fix the cause of the leak.

The only way to understand the leaks, is to start to analyse your financial reporting and start digging underneath the pretty numbers until you get an understanding of cause and effect.

READ: The 10 most useful reports in your accounting software

4. Look at non-essential costs

Are you spending money on areas which aren’t helping your business to grow?

It’s time to understand where you should be spending your hard-earned money.

Anything that isn’t contributing to your business growth (financial growth, brand growth or professional development) should be questioned and reviewed.

Don’t be afraid to say no if that means you get back on track and head towards your financial goals.

5. Profit does not equal cash

Say what!?

This tends to be the hardest concept to get your head around as a business owner.

While you could be making a profit, spending your money on personal expenses can bleed your business bank account dry.

When it comes time to pay things like GST, superannuation or suppliers – you’re left in a pickle. Payment plans just delay the agony.

Your Profit and Loss Report is important, but start to understand your balance sheet.

READ: Why is the balance sheet important?

6. Use separate bank accounts

Bank accounts help save money and build up cash.

For example, we have a business savings account for our cash reserves which we’ve used to fund our staff growth, to buy new computers and to fund our interstate conferences for our development.

We also have separate bank accounts for GST and Income tax, so we know our debts to the government are set aside each quarter ready to go.

These separate bank accounts eliminate the cash flow pain points.

7. Review your budget

A budget isn’t something you should spend ages creating, only to tuck it away in the back end of your accounting software never to be used again.

We see a budget as an ever-changing tool, reflecting performance, growth, highs, lows, financial goals and so much more.

As your business evolves, so should your budget.

Set new goals to aim for and benchmark yourself as to whether these goals are achievable and giving you the financial outcomes you desire.

Cash the ultimate prize as a business owner, but it’s not just about debtor management.

That’s a part of it, but understanding the movements of cash within your business is like solving a puzzle where the reward is being able to build your business for long term sustainable growth.