Money management

Common small business cash flow mistakes (and how to avoid them)

Common small business cash flow mistakes (and how to avoid them)

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It doesn’t matter how big your business is, what industry you’re in, or how long you’ve been operating; if there’s one thing that’s true for all businesses, it’s that a healthy cash flow is paramount to survival and growth. Still, there are plenty of small business owners—especially early in the journey but across the board—who get caught in common cash flow mistakes that can lead to money problems and risk the health and longevity of their businesses. 

Here, we break down some of the most common cash flow pitfalls that affect small businesses and give you tips on avoiding them.

Overestimating future sales and revenue. 

On the one hand, a positive attitude goes a long way when running a business, and a little optimism can make all the difference when persevering in the face of standard small business hurdles. On the other hand, being too optimistic—for example, overestimating your future sales volume or revenue numbers—could spell trouble for your business down the road. 

Tip: Using run rate estimates and regularly updating revenue projections helps you maintain a realistic expectation of where your business is going. And even then, forecasting isn’t a science; there are no guarantees that you’ll hit expected revenue numbers in any given period. That’s why, when building sales projections, it’s always better to err on the side of caution. In other words, while you can set a high revenue goal, your budget and cash outflow plan should be based on a more conservative estimate of future revenue numbers and not on your aspirational target.

Getting revenue and profit confused.

Managing your cash flow well means knowing how much money is going in and out of your business. Unfortunately, many new business owners confuse revenue and profit in their early days of tracking performance. While revenue looks at the total value of sales and income, profit is your net income, or what’s left after deducting all expenses and debts from your revenue. In other words, while high revenue numbers are great, they don’t mean as much if your average monthly costs and expenses are consistently high. 

Tip: Make it a habit to look at your cash inflow and outflow every month. This will allow you to calculate profit, which is a more accurate indicator of how much money your business is actually generating. Having a handle on this number will enable you to make more informed financial decisions for your business over time.

Failing to keep track of inventory. 

Ineffective or nonexistent inventory management can significantly contribute to cash flow problems, yet just under half (43%) of small businesses don’t track inventory or do so manually. Unfortunately, when you don’t have a handle on inventory, it’s easy to run into out-of-stocks or order delays. This not only interrupts your immediate cash flow but could jeopardize customer loyalty and cause long-term cash problems, as well. 

Tip: Make a habit of regularly auditing your stock to get a sense of how long your current inventory will last you. Cross-reference that information with historical data about sales performance (e.g., busy seasons where you might sell out of things faster) to make sure that you’re building out the correct projections. It also doesn’t hurt to stock up on extra inventory, when possible, to minimize the chance of running out if business picks up unexpectedly.

Being passive about late invoices. 

If you run a B2B business, you know that invoicing is a big part of maintaining a steady cash flow. Needless to say, when clients are late with their payments, this can leave your business in a tight spot and cause serious disruptions in how you run your business. The issue may also worsen the longer that you let it go unaddressed since it may signal to clients that they can be flexible with their payments if you’re not firm about deadlines.  Being proactive about invoices helps ensure that unexpected delays in payment aren’t a recurring issue for your business. 

Tip: Setting clear boundaries and expectations with your client from the start is one way to minimize invoice delays, but it doesn’t always do the trick. When that’s the case, you can try your hand at different tricks to encourage timely invoice payment, such as charging in advance or offering multiple payment options.

Forgetting to consider seasonal cash flow changes. 

Even the most thriving businesses have high seasons and low seasons; it’s perfectly normal and to be expected. That said, mapping out your business’s expected performance for the year without considering traditional lulls and slowdowns can leave you feeling stuck if (and when) seasonal dips in revenue occur. For example, if summer is historically a slow season for your business, it’s not ideal to do a financial forecast based on spring or winter performance. This sets false expectations about how much revenue your business will generate for a chunk of the year. That could set you up for poor planning and uninformed spending that hurts your business. 

Tip: Familiarize yourself with your business’s unique performance trends and be conservative with planning out your budget so as not to end up with a tight cash flow situation when business slows down. You can also consider tapping into a lending solution, like a line of credit, to give yourself a cash cushion when you need it.

Scaling too quickly. 

While it can be tempting to scale your business as quickly as possible, there are plenty of benefits to taking it slow and being mindful of the process—and a healthy cash flow happens to be high on that list. Overly rapid growth can lead to a situation where cash outflow increases to accommodate more business, yet inflow hasn’t caught up because your revenue is still from a period of lower sales volume. While inflow may eventually catch up to outflow, the lag time in between can cause a detrimental cash flow crunch, and covering that could make it so that revenue is always a step behind expenses and costs. 

Tip: Pace yourself. Look for ways to increase your revenue gradually while keeping costs relatively low. This way, your profit begins to increase month over month, putting you in a favorable cash flow position. Over time, you can start to scale more quickly once you have a solid financial foundation that lends itself to supporting potential cash flow gaps between growth phases.