Just as a fisherman must watch the ebb and flow of the tides, an investor and businessperson must be keenly aware of the subtle shifts in cash flow.
– Robert Kiyosaki
Sometimes, it’s not the lack of sales that causes a business to fall into difficult times, but poor cash flow management. Accurate cash flow forecasting helps organisations prepare for the future, as it anticipates a company’s revenue and expenses. Unfortunately, it’s not often as straightforward as it may seem.
Here are common cash flow management and forecasting mistakes you should avoid.
1. Not being diligent on overdue accounts and unpaid invoices
A few overdue accounts or unpaid invoices may seem trivial. Still, they can quickly pile up and lead to serious financial woes.
Unless your invoices are settled, you have nothing to fund your payroll, inventory, or your organisation’s next marketing campaign. It will not be easy to manage and create a cash flow forecast if you don’t know when money is actually coming in.
2. Having high customer acquisition costs
Generating sales is essential for any business. But, focusing too much on sales and disregarding other factors that go with it could do more harm than good.
Two critical aspects that some businesses fail to consider are the cost of customer acquisition and customer lifetime value. The cost of acquisition is what you spend to gain a customer. Customer lifetime value, on the other hand, is the total profit you earn from a single customer during its lifetime (time that they are your customer).
When it comes to sales, you must aim for a high customer lifetime value and a low cost of acquisition. Spending too much to acquire customers that won’t yield long-term profit would negatively affect your cash flow.
In your cash flow forecast, it’s essential to be realistic about your customer acquisition costs and customer lifetime value. How much can you afford to spend to gain a customer? How much are you expecting to earn from each customer gained?
3. Forcing Growth
Like sales, growth is crucial for any company. Unfortunately, some businesses try to grow too quickly by pouring cash in advertising, a new branch, or extra inventory. If your ROI isn’t for a few years, you could end up hurting your company’s cash flow in the short-term.
There is nothing wrong with going all out to expand your business. But remember, your company needs to endure the period when you’re waiting to reap the fruits of your labour.
Will you have enough money to keep your business afloat will you wait for the profit to start rolling in? This is something you should think about when creating a cash flow forecast.
When done right, cash flow forecasting could help you organically grow your business, acquire lines of credit, and develop long-term financial projections.
Let us help you have a great start to your year. Please fill out our contact form or give us a ring at 02 6752 9700 to learn more about our cash flow forecasting service.