Major Cash Flow Management Mistakes That Can Kill Your Small Business

By Darren Mathew

Starting a business is never easy. Running and growing one is another challenge altogether. Whether it’s your first company or your fourth, the risks and opportunities are always boundless, and so is the pressure to make it work.

While there are a million different things that can go wrong with an emerging business, there are some common business mistakes that get in the way of almost every entrepreneur. One particularly nasty one is cash flow management.

Maintaining a healthy cash flow is critical for any business's longevity and success, but it's also a problem because cash flow concerns are never an immediate priority. Don’t get me wrong, most entrepreneurs do take cash flow management seriously, but it often takes a back seat, overshadowed by that critical meeting after lunch or the upcoming product launch. As a consequence, businesses start bleeding money—not all at once, but slowly over the months, until we get to a point where the flow stops.

U.S. Bank’s research suggests that around 82% of all small businesses in the United States fail because of poor cash flow management. And if that’s the case, how do we know your business won’t run into cash flow disasters later down the line?

It doesn’t matter if you use the best accounting software in town or how foolproof your business model is, cash flow mistakes are fairly common, and you could be guilty of them even without knowing it.

So what makes cash flow management so difficult? What are some of the common cash flow mistakes that your business needs to watch out for? And what is the best way to ensure a healthy cash flow for your growing business?

To understand cash flow, we need to understand operational strategies. As the name suggests, an operational strategy outlines how a business decides to operate. Cash flow disasters occur mainly because of two reasons: either your business has a poor operational strategy to begin with, or your business has a good operational strategy but fails to execute. Both of these reasons can be detrimental to your company. Let’s break them down in further detail.

Cash flow management mistakes that stem from a poor operational strategy

A leading cause of most cash flow disasters is a failure to plan for them in advance. While no business can ever fully prepare for what comes its way, one can at least derive some valuable insights from the mistakes of others.

The following are common blunders that businesses need to watch out for.

Lack of cash savings

From investments to revenue, companies today rely on a bunch of different cash sources to stay afloat. The problem is, these sources aren’t always reliable. Payments can get delayed and investors can back out—worst scenario if it all happens at once. Companies that find themselves in a tough spot often fall back on cash reserves to survive the "winter."

Sadly, though, according to a Goldman Sachs survey, 44% of small businesses in the United States have “less than three months cash reserves in case of an emergency,” and only 31% say they were “very confident they could access capital if they needed it.” This is the closest a company can get to “living paycheck to paycheck.”

As tempting as it might be to reinvest profits and incoming cash flow into business-growing initiatives, it is important to prioritize the business’s long-term longevity over its short-term growth.

Not planning for unexpected expenses

No matter how impeccable your business model is and how flawless your execution might be, there will always be unexpected downturns that might catch you off-guard. Preparing for these is really off the table because there is no way to see such expenses coming (that’s the whole point of calling them “unexpected,” right?)

However, a business can still be prepared for these by having a flexible business strategy and banking up cash savings. If setting up an emergency fund is difficult, try having a separate bank account altogether for the purpose. The best approach is to be prepared for these occasional surprises by having a cash cushion to rely upon.

Ignoring massive outflow for profits

When things start picking up speed, it is easy to go with the flow and risk more than what we are willing to lose in the hope of making it big. Often when business is good, companies end up spending too much trying to secure bigger profits. But enduring massive cash outflow for growth can stretch your business thin, sometimes even up to its breaking point.

Regardless of how steep your growth curve is or how lucrative an opportunity might appear to be, always stick to your planned budget. Do not extend beyond what your balance sheet allows. This isn’t to say that you can’t be flexible with your decisions, but being too flexible is as good as having no strategy whatsoever.

Not planning for reliable revenues

As a business owner, you’ve done your part: you’ve identified your target audience and built a great product/service to address their needs. Now, all there is to do is roll out your product and wait for the money to come in, right? Wrong.

Building a business is just one part of the equation; the other is ensuring that it runs profitably. One of the biggest challenges startups and small businesses struggle with is building reliable revenue streams. That’s partly because emerging companies don’t necessarily operate on strict business terms. They often tolerate things like payment delays and tentative agreements, believing they need to make up for their lack of experience with generosity and patience.

Such an approach, though convenient, doesn’t help your cash flow situation. The final goal any business aspires toward is having a steady and reliable income stream. And while it is fine to take your time trying to get there, you must also ensure you are doing so as fast as possible.

More articles from AllBusiness.com:

• Outlining Operational Strategies in a Business Plan
• Seven of the Most Reliable Career Paths
• 5 Strategies for Getting More Money Out of Your Business
• 6 Steps to Developing a Small Business Marketing Budget
• What Is a Balance Sheet and How Can It Help Your Business?

Cash flow management mistakes that stem from poor execution

The other major reason why cash flow-related problems plague emerging businesses is that a lot of times, despite getting their strategies and financial planning right, small businesses often struggle with executing these strategies. They often end up spending too much on things they shouldn’t have spent on or find it hard to keep track of all their accounts.

In any case, a lot of businesses struggle with serious cash flow issues even after coming up with a resilient financial plan. Let’s discuss some of the ways in which businesses can fail at executing a disciplined financial strategy to help you stay in the clear when it comes to these vulnerabilities.

Failure to track your accounts

If you are serious about your business, ideally at least, you need to keep track of every dollar you earn and spend. Easier said than done, I know, but tiny expenses here and there often add up, especially when we don’t pay attention to them. Not keeping track of your accounts in situations like this almost guarantees cash flow disasters later down the line.

Luckily there are many inexpensive (even free!) but robust and capable accounting software programs available to help you track your finances. Though no software can do your work for you, having good tools certainly makes the job easier. A well-accounted business is a healthy business, and you need to ensure that yours stays that way.

Investing heavily in products and services

No one ever plans to spend a fortune on services and tools they know they don’t need, but software development companies have gotten so good at marketing their offerings it can be hard to say no. It’s easy to slip into the trap of believing that a given app or a specific service will completely change the way you do business, while in reality, having too big of a tech stack can seriously slow you down. This applies equally to physical spaces and tools as much as it does to digital services and software.

Your startup doesn’t need fancy office furniture from day one, just as it doesn’t need a $25 per user communication and productivity app subscription from the beginning. Start with the barest of necessities and scale up accordingly. Being frugal is the best way to ensure you aren’t stressing your budget.

Failure to think and act in terms of cash flow

Another mistake small businesses fall victim to is that they suffer from a disconnect between the budgeting and spending sides. Meaning when making purchase decisions, most young businesses don’t look beyond affordability.

In reality, buying and spending decisions should be made solely considering long-term cash flow health. Skipping on something you might need even when you can afford it may seem stupid, yes. Still, the real question worth asking here is can you afford the said need on top of your monthly expenses while maintaining a reliable emergency budget?

As a business, one of your most valuable resources is your working capital, and not thinking in terms of preserving it can most certainly lead to trouble. In most cases, businesses that fail to act in capital-preserving ways end up in debt and need to rely on credit to stay afloat.

However, with credit comes interest and a vicious cycle of debt that eventually ends up devouring your profits. Thinking and acting in cash flow conscious ways right from the start is the best way not to end up cash poor.

Achieving a healthy cash flow isn’t as hard as it seems

Contrary to how it may appear, the secret to healthy cash flow is simple: come up with a resilient but flexible operational strategy, and have the discipline to stick to it. Doing so won’t just keep your books in the green; it’ll actually boost your business cash flow.

This advice may seem too general to be practical, but when it comes to cash flow, it is more about being disciplined than it is about being efficient. There are no shortcuts, but there aren’t any secrets either. As long as you make sure your decisions are well informed, justified, and cash flow conscious, your small business can save itself from common cash flow blunders most companies succumb to.

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