Failing to forecast cash flow
Without a realistic cash flow forecast, you’ll be flying blind when it comes to anticipating shortfalls and having enough working capital on hand. It’s important to map out your expected inflows and outflows at least 12 months in advance, updating it monthly based on actuals. This will allow you to plan ahead and avoid costly cash crunches.
Underpricing your products or services
When you’re hungry for new business, it can be tempting to lowball your pricing to lure in customers. But this is a slippery slope that devalues your worth and makes it extremely difficult to be profitable. Performing competitive research and calculating your costs and operating expenses can guide you in pricing your offerings. You can always offer discounts or promotions selectively, but be mindful of always offering discounts, as you want your services to be seen as valuable.
Lacking a cash reserve
Inconsistent cash flow is one of the biggest challenges small businesses face. Despite your best efforts, you’ll likely experience periods of boom and bust throughout the year. Not having sufficient cash could leave you scrambling and lead to expensive debt during lean times. It’s recommended to keep a cash reserve equal to 3-6 months worth of operating expenses in the bank.
Letting receivables pile up
Another major cash flow killer is letting customer invoices go unpaid for too long. Develop a firm collections process and don’t be afraid to get assertive with late-paying clients. You can offer incentives for early payment and penalties for late payment if appropriate. This is where having sufficient working capital is key, as it lets you cover expenses while you pursue what you’re owed.
Ignoring retirement planning
When you’re consumed with running your business, it’s easy to put your personal retirement on the back burner. You should look into tax-advantaged retirement plans, talk to a financial advisor, and start making regular contributions, even if they’re small at first. Compound interest is a powerful wealth-builder over time, so the earlier you start planning for retirement the better
Running a thriving small business requires much more than hustle and great products or services. You need to be proactive about money management and avoid the pitfalls that derail too many promising businesses. The sooner you identify your financial vulnerabilities the better and you’ve set your business up to thrive through both the ups and downs of entrepreneurship.
