Managing cash flow is an important, but often overlooked, function of small business. All too often you can find your business in financial trouble if you don’t learn how to handle funds correctly. Here are some common mistakes you should be aware of:

“Fly By the Seat of Your Pants” Accounting
Many people are, unfortunately, never taught how to handle finances. Teenagers open checking accounts when they get their first job, and never seem to learn how to keep up. I’ve talked to many in the banking industry who run into people that say “I had checks in my checkbook, so that means I have money in the account.”

Fortunately, if you own your own business, you are probably a bit smarter than that, at least I hope so. But many business owners still don’t keep track of the business finances well enough. They have a tendency to pay bills as they come, buy supplies as they need them and spend money on personal items because it’s there.

Even if you have an accountant, you should still know what’s coming in and what’s going out. You should have a budget for spending. And by all means, balance that checkbook. In fact, I highly recommend using accounting software to keep yourself double checked on all transactions.

Relationship Between Receivables and Payables
Basically, if you don’t have anything coming in, then you can’t very well send anything out. Therefore, if you don’t keep up with your billing, sending monthly statements to clients and keeping track of whose paying and whose not, you’re not going to have any funds to pay your own bills. Do what you can to keep the money coming in, even if that means changing your strategy and require clients to pay in advance or make down payments toward your product/service before you supply it. For more advice in this area, see a previous post: Debt Collections Strategies That Work.

Profit vs. Available Funds
Profit rarely means spending money. Too many people make the mistake of spending their profit because it’s there and that anything above the cost to make and supply their product/service is available for whatever they choose. Instead, you need to realize that your profit goes toward the upkeep of your business. While you may have made more than what you spent on that particular product, you still have bills to pay and business expenses including supplies, marketing, staff, etc. Your actual available funds come far after the profit has been distributed the the various expenses contained within your budget.

Frivolous Purchases
And even those business owners who realize that they have bills and expenses to take care of, can often get carried away with the leftovers. Don’t spend away the entire future of your company on a yacht or sports car. Instead, try and reserve the excess income for work related expenses only (like boosting your advertising campaign or investing in a new product). Now, obviously, if your business keeps food on the table, the excess income should be intended for supporting your family. But don’t go over the top. Live reasonably and a within your means, looking toward the future for your business and you family.

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