Business owners are often overloaded with tons of activities revolving around their business, and they have very little time left for managing cash flows or scratching their heads on company’s finances. On the other hand, mismanaging your company’s funds might lead to total failure of your business. Even though you have the brightest of ideas and your company is on the growth ride from the very first day, it is often seen that 80% of the businesses, big or small, fail or close down, just because they cannot manage their cash flows. In this article, you will find some of the deadly cash flow mistakes that can really hurt your business. Find out if you are making one of these mistakes and learn how to avoid these.
Forced Growth; what is forced growth? A call for more cash to be paid to the staff, bigger office for accommodating more people and clients, an introduction of new products, higher than needed that would call for greater expenses. These are effort-oriented tasks that need to be handled rapidly as loss of too much cash will severely affect your day to day operations. These extended services bring in more revenues, but with revenue comes in more cash outflows. Efficiently estimating these cash outages in due course of time can help you prepare for constraints.
Incorrect Calculation of Profitability; Many a times, businesses feel that there is enough profit from every transaction they enter into. However, businesses of all sizes run into severe cash problems because they have committed too much on overheads. Sometimes, a healthy, cash-rich company buys a huge office or invests too much in rents, fancy utilities, etc. and treats them as trivial at first. Nevertheless, when the going gets tough, it becomes difficult for the company to keep up with these excessively committed costs and end up losing cash rapidly. Thus, a company can become cash-hungry from a cash-rich company in a matter of time. Anticipating these expenses and the consequences of the same is necessary for the well-being of the company. One can only be profitable when there is enough money in the bank accounts left after paying off all your expenses.
Ignoring Seasonal Nature of the Business; this is applicable for some businesses that do not have a yearlong operation. These businesses find them tremendously cash-rich during their peak seasons and on the other hand face difficulty in managing daily cash outflows. When the cash-rich season begins, it leads to overhead commitments that are difficult to maintain during the off-seasons. Besides, these off-seasons result in discounts and offers, which reduce the margins for the sake of maintaining some level of sales. There should be enough provisions for these off-seasons in your financial plan.
Improper Management of Taxes; Taxes are statutory obligations that are obligatory in nature and has to be paid mandatorily, whether you like it or not. Moreover, it has to be paid whenever it is due. Whenever you miss the deadlines, it can attract interests and penalties that can influence the cash flows. You can seek the help of an expert tax consultant in identifying the approximate amount of tax that you will end up paying the next year. It depends on the growth plan of the company anticipated for the forthcoming year and the financial budget presented by the Ministry of Finance at the beginning of the fiscal year. So, it’s always wise to plan for such statutory uncertainties. It has a long lasting impact and making ample provisions for the year to come will always be beneficial to the company.
Miscellaneous Hidden Costs; some costs seem insignificant in the beginning, but usually, accumulate over the years and when effected, can prove to be a dent to the whole company.These can be insurance coverage, credit card dues, unforeseen employee attrition, permits/licenses, overdue employee benefits, commercial and legal fees and much more. These additional costs cannot be anticipated in advance but may result due to lack of knowledge or awareness of the owners or managers.
Cost is like water and can seep through the smallest of holes. A magnet of sorts attracts expenses and outflows. When you have a proper financial plan that estimates or provides for all kinds of costs, be it exigencies, contingencies or thought for, it is always beneficial for the company. It helps the owners to be prepared for all kinds of situations and not fall into the trap of working capital overruns.
At Korsell Corporate Consult Limited, we can help you with your business strategy documents, fund raising, business models, business diagnosis and other custom services. Call: 055 391 9618 or Email: email@example.com