Small business owners are often burdened with tons of activities that revolve around their business and have very little time to manage cash flows or think about company finances. On the other hand, mismanagement of your company’s funds could lead to the total bankruptcy of your business.
Even if you have the brightest ideas and your business has been growing from day one, it has often been seen that 80% of companies, large or small, go bankrupt or close simply because they cannot manage their cash flows.
In addition to damage, some hidden costs or expenses have a negative impact on cash flows, which are very difficult to manage as they are not perceived.
In this article, we break down some of the deadly cash flow mistakes that can really hurt your business. Find out if you are making any of these mistakes and learn how to avoid them.
1) forced growth
One of my friends who runs a software development company started experimenting with Facebook ads. In the first month itself, he got good returns on his investment. He immediately increased his AD spending 5x, anticipating 5x sales growth.
Well, it wasn’t. He generated more leads, but not in proportion to the ad spend. He spent more than he earned that month and ended up ruining his cash flow. He had to take out a short-term loan to cover his expenses for the month.
It is good for a company to have a great growth record, but sometimes having excessive forced growth can spell doom for the company.
What is forced growth? It would require more money for staff, a larger office to accommodate more people and customers, new product launches, more AD spend than necessary, etc. Which would require higher expenses.
These are effort-oriented activities that need to be handled quickly, as losing an excessive amount of money will seriously affect daily operations. These extended services generate more income, but with the income comes more cash outflows. Efficiently estimating these cash outages in a timely manner can help you prepare for needs.
2) Spending too much on sales
As a small business, acquiring new customers is impenetrable, even at the cost of losses. There are two metrics to identify if your customer is delivering the benefit that he expected. One of them is the customer’s “acquisition cost,” which is the amount spent to acquire a customer.
The other is the customer’s “Lifetime Value”, which is the total income generated by a customer during the customer’s lifetime. You need to ensure that the useful life value is greater than the acquisition cost. In this way there is a positive effect on the cash flows of the company.
Spending excessively on the cost of acquisition could lead to a small customer with very little profitability. Many companies hesitate on this point, since they perceive that the more customers, the more benefits.
There are many hidden items in the cost of ownership. For example, the salary of the seller, the amount spent on your mobile and Internet connection, the cost of your office seat, your commissions, etc. All of these indirect costs must be added together to correctly calculate the customer’s acquisition cost.
If you don’t, you will unknowingly start burning more money than you make and ultimately affect your cash flow.
3) Incorrect profitability calculation
One of our ProfitBooks customers sells mobile accessories in the e-commerce marketplaces. Buy things with a 40% margin from your sources. For example, buy a headset for Rs. 600 and sells it for Rs. 1,000. I always used to believe that I was earning between 30% and 40% on each sale considering the minor expenses.
But when he prepared his balance sheet at the end of a year, he realized that he had suffered losses. It did not consider the market fee, transaction fee, shipping cost (which varied for each order), inventory storage cost, and most importantly, cost of returns.
Many times, companies feel that there is sufficient profit from every transaction they make. However, companies of all sizes run into serious cash flow problems because they put too much effort into overhead.
Sometimes a healthy, cash-rich company buys a huge office or invests too much in rent, utilities, etc. And at first he considers them trivial.