One of the biggest challenges for new entrepreneurs across the board is learning how to manage their finances. This is especially true of cash flow management. If you’re not used to handling a business budget or invoicing, it’s easy to lose track of how much money is coming in versus going out of the business.
Because cash flow is such an essential indicator of a company’s overall financial health, it’s important to learn how to master best practices and avoid critical pitfalls. Below, nine members of Young Entrepreneur Council shared some common mistakes they’ve seen entrepreneurs make with their cash flow and how to avoid them as a new business owner.
1. Spending Money Before You Have An Established Business Model
Don’t spend money before you’ve established your business model or figured out “what works.” A lot of entrepreneurs are eager to hit the ground running, but a methodical approach is preferred. Take your time to establish the right product-market fit and marketing channels before scaling up your spending. Too many entrepreneurs burn money way too fast, limiting their runway. As a small business, it’s important to keep your runway as long as possible as you figure out what works best for your product and business. – Andy Karuza, Base64.ai
2. Failing To Learn The Basics Of Working Capital
An untold number of businesses have been undone by fast revenue growth and an inability to fund a growing working capital balance. It is absolutely critical that any entrepreneur understand what their business working capital needs are and plan ahead to ensure their ability to finance growth. There are more financing tools than ever before, meaning for those who understand and are prepared, it need not be the catastrophic cash crunch it often is for early-stage businesses. – Colin Darretta, Innovation Department
3. Mistaking Revenue Or Net Income For Cash
Don’t mistake sales revenue (or net income) on your monthly profit and loss (P&L) statement for cash. Sales revenue leads to cash, but only if you collect it! I heard an entrepreneur once say, “I just don’t understand why we have no money; our sales are growing every month, and we’re profitable!” Based only on the income statement, both statements were true. The problem was, a sizable chunk of this company’s sales revenue wasn’t being collected. At the same time, this company had staffed up to service that revenue. You can’t make payroll with the revenue in your income statement! Your P&L is a valuable management tool, but it must be analyzed in conjunction with other reports, like your accounts receivable. – Ben Landers, Blue Corona
4. Forgetting About Taxes And Overhead
Revenue is vanity. Profit is sanity. Cash is queen. Many new entrepreneurs don’t consider that for every dollar they bring in in revenue, a portion of that goes to taxes and overhead. Plus, if you’re a corporation, you are taxed twice as a company and as an individual in your personal tax returns. While maintaining a healthy profit margin is ideal, having the cash flow to survive three-to-six months of burn rate gives you freedom to make sound and strategic decisions as a business owner. As a law firm, we’ve identified who our core value clients are and even during slow seasons we can say no to prospects that are not a good fit. When you are low on cash flow, it’s tempting to take any paying client who walks in the door. Doing that can lead to headaches and bad service. – Givelle Lamano, Lamano Law Office
5. Leaving Little To No Room For Budget Contingencies
Not leaving room in your budget for contingencies is a mistake. For example, I use overseas shipping. Since Covid, when I pull a container from China, the cost can fluctuate greatly, so I always need to be aware of possible price changes. Container shortages, space availability and tariff can give me an unexpectedly large bill when the container hits the U.S. It’s something I have learned to be prepared for months in advance. – Shu Saito, Fact Retriever
6. Failing To Pace Yourself Financially
One common cash flow mistake I’ve seen new entrepreneurs make is failing to pace themselves financially. It’s important to know what’s worth spending on in the early stages of running your business so you don’t end up with minimal to no funds. You might think a large purchase is necessary, but it’s crucial to weigh the pros and cons before diving in. Ask yourself how you’re spending your money and if there are ways you could be smarter about it. You’ll likely find ways you can cut costs and save more for the future. – Stephanie Wells, Formidable Forms
7. Directing Too Much Capital To Ineffective Marketing Efforts
When you first start a business venture as someone new to entrepreneurship, your ability to maintain control over your cash flow is essential. Of course, this is far easier said than done. One of the most common mistakes new entrepreneurs make regarding cash flow is directing too much capital to marketing efforts that are ineffective. When marketing plans don’t work out, it doesn’t just burn up existing cash—it also fails to generate greater cash flows in the future. The thing to remember is there’s a delay between marketing efforts and sales results, so mistakes in marketing spend may cause a cash flow crunch right when you expect more cash, ruining plans and straining budgets. Therefore, it’s critical to spend wisely on marketing that will deliver the best ROI long term. – Richard Fong, AssuredStandard.com
8. Forgetting About The Invoicing Cycle
In the hustle and bustle of launching a company, many new entrepreneurs miss one crucial part that significantly affects cash flow: the invoicing and cash cycle. It’s important to know how long it will take to sell your product or service and bring in revenue to cover the cost of inventory. If you sell your product or service quickly, but it takes you 60 or even 90 days to receive payment, you have a very large cash flow gap. While your business may appear profitable at first glance, in reality, cash flow is tied up in accounts receivable. Spending time really thinking through your payment schedule and cash flow is critical in preserving working capital and safeguarding your business’ future success. – Blair Thomas, eMerchantBroker
9. Trying To ‘DIY’ Your Finances
Seek professional help. Too many first-time entrepreneurs think they can handle bookkeeping, accounting and forecasting themselves. The truth is, when you’re focusing all your attention on growing and operating a new business, it’s very easy to take your eyes off the bottom line. That can be a fatal mistake. Tools like Xero and QuickBooks can certainly take much of the drudgery out of bookkeeping, but they’re no substitute for an experienced accountant or tax professional. Don’t try to save money by going without qualified financial help. Tracking and forecasting your income and expenses is not the place to cut corners. – Mark Stallings, Casely, Inc.