5 Crucial Cash flow Mistakes Businesses Must Avoid

"Cash is king," an age-old saying in the business world, indicates the significance of cash in every business. It is cash flow that keeps a business alive; no cash means no business. Cash inflow is very crucial to maintain a healthy business. An organization could have various sources of cash inflow, such as customer's payments, monetary investments, loans, interest obtained from savings, and more. But, poor maintenance of cash flow would eventually damage the business. It is observed that close to 80 percent of organizations have doomed due to poor cash flow management. Here are a few mistakes that businesses should avoid in order to grow.

Late Payments

Client payments are a major source of cash flow for organizations. The organizations should take proper measures to ensure timely payments. Hence, earlier, the invoices are sent to the clients, quicker the payment process would be initiated. It is a wise decision to send the invoice right after completing the work assigned, or even before its completion would be ideal to start the payment. Also, a regular reminder on the invoice would urge the clients to process the payments at the earliest.

Forced Growth

Some organizations tend to indulge in unwanted expenses like bigger and luxurious office space, high remuneration to staff, and other miscellaneous expenditures that would drain the cash inflow spontaneously. An organization's needs could be reasonable, but meeting the requirements has to be carried out gradually with proper planning to ensure sufficient cash is reserved for performing the organization's day-to-day operations without hassle.

Excess Expense on Sales 

An organization's profit depends on its sales. A company has two metrics to decide its profit and loss, i.e., acquisition cost and lifetime value. Acquisition cost is the amount spent in the process of gaining a customer, while lifetime value is the total profit earned from that customer. The acquisition cost usually includes certain hidden costs such as sales person's salary, phone and internet charges, commission, and more, which could harm the company's cash flow. Thus, to maintain positive cash flow, the organization must ensure that the lifetime value is higher than the acquisition cost.

Inaccurate Profit Estimation 

Most of the time, the organizations tend to calculate profits incorrectly, by considering only the margin obtained on every product's sale. But, the realization occurs only while preparing their balance sheet towards the year-end, which spotlights other criteria that were overlooked, such as marketplace commission, shipping cost, transaction fee, and, most importantly, cost of returns which could be a matter of concern in terms of company's profit.

Improper Tax Management

Missing out tax payment due dates is a crucial offense a company could do. This would attract unnecessary interests and penalties that could disrupt the company's cash flow. Furthermore, if the organization misses its deadlines regularly, it could invite income tax and commercial tax departments for an audit, which would result in a further penalty on the existing interest.  

The organization should have sufficient cash on reserve to operate its business seamlessly as running out of cash would pause all the functions of the business. Thus, the organization must closely watch all its receivables and payables to sustain and grow.

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