Petr is the founder and CEO of Invoice Home, an invoice generating platform designed for small businesses, freelancers and entrepreneurs.
Entrepreneurs pride themselves on taking financial risks in order to pursue their dream of running a business. But to lower the risk of failure, entrepreneurs have to properly manage their business’ cash flow.
This is especially true during challenging economic times. Without a solid cash flow practice in place, many entrepreneurs will almost certainly face financial and operational challenges.
The U.S. Bureau of Labor Statistics reports that 21.7% of businesses will fail within the first year of opening. SCORE Foundation, an organization dedicated to helping entrepreneurs, notes that the leading cause of small business failure is poor cash flow management.
As a provider of invoicing to millions of entrepreneurs worldwide, here are the seven cash flow pitfalls to avoid.
1. Neither A Borrower Nor A Lender Be
One of the oldest cash flow pitfalls in the book also happens to be a line from Shakespeare’s Hamlet. This can haunt you in any economy, but in one as uncertain as we’re seeing in 2023, you could be dealing with a cash flow time bomb.
Say you’re a stay-at-home mom who decides to turn a candle-making hobby into a business. With higher interest rates, taking out a loan to buy wax, wicks and packaging can make it even harder to turn a profit selling candles. In this case, the best approach to avoid any loans might be to make only a few candle scents and focus on growing them organically. Once you have market traction and more revenue, you’ll be in a stronger position to obtain financing to expand.
2. Forgetting About Taxes
You got paid for your hard work. Maybe it’s washing windows on Main Street or on a platform over Wall Street, but you forgot to set aside money to pay your payroll taxes.
Unfortunately, in the eyes of the IRS and state tax authorities, they won’t cut you much slack for failure to pay taxes. Don’t let this cash flow mistake bite you in the hind quarters come tax time, as it could lead to an expensive fine on top of the taxes you owe.
3. The Devil’s In The Details
There are a lot of moving parts to businesses. Say you run an online boutique supply company. One Saturday, you realize your business bank account is now in the red. It dawns on you that you have neglected to send invoices to some customers.
A little more digging around reveals that you have mislaid some of your purchase orders for supplies and are behind on vendor payments. Now you’ve got to catch up on invoices and figure out how to slow down paying your vendors. If you want to keep store inventory in proper order, you might consider hiring a bookkeeper or using inventory management software.
4. Your Revenue Forecast Is Wrong
Imagine you are a fledgling wine producer in Oregon. You had a good year in 2021 because of a flattering review from an online wine expert who gushed about your latest pricey chardonnay.
Your response? Plant a bunch more eventually. Fast-forward to 2023, and customers are far less inclined to spend money on high-priced wine. That extra cash you put into more chardonnay resulted in additional cases that you’ll now have to sell at a loss. To avoid disastrous misses on forecasts, consider sharing it with some trusted business advisors like your CPA or business banker.
5. Knock, Knock: Is Anybody Home?
There’s nothing worse than putting in a lot of hard work and not getting paid for your effort. Imagine a plumber who works hard to get a new home properly set up with its bath and shower, bathroom fixtures and toilets only to get the cold shoulder from the general contractor.
The burden often falls on a subcontractor to go knocking on doors for payment. It’s a delicate line to walk. If you want to be in business in 10 years’ time, however, you’ll have to knock on a lot of doors. Make sure to stand up for yourself and get paid for every service, for it can add up quickly.
6. Be Careful Who You Do Business With
Many cash flow mistakes entrepreneurs make can be tied to who they decide to bring on as a customer. By not being selective about who you do business with, you risk having more clients who either slow pay you, partially pay you or never pay you. Sadly, as the economy goes south, you will probably see problematic customers popping up more. Doing some up-front research—give LinkedIn and Google business profiles a try—can help you find out whether a potential customer is trustworthy or not.
7. Payment Is Due
As an extension of my point about paying attention to details, this topic has such a huge impact on collecting payments I think it’s worth noting separately.
Too many times, entrepreneurs make the mistake of forgetting to negotiate payment terms for their work and then making sure those terms are included on the invoice they send for the work done.
For those not in the know, an invoice is not an actual contract, but it does show what two parties have agreed to transact together. As long as you hold up your end of the bargain by performing the work agreed to, you have every right to expect payment. Just don’t forget the payment terms on the invoice.
The Importance Of Cash Flow
Cash flow is the lifeblood of any business. For entrepreneurs who don’t have the same access to capital and cash savings as large corporations, a cash flow hiccup could lead to a tragic end to a lifelong dream of owning a business.
Despite the toughening economic conditions we face in 2023, there’s still some good news for entrepreneurs. With the proper amount of planning, customer vetting, attention to details like invoicing and a never-say-die attitude toward collecting on work performed, there is no reason why hard-working entrepreneurs can’t have a banner year.
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