Top 5 cashflow mistakes successful SMEs should avoid
Cashflow is the lifeblood of an SME. Even a profitable business can quickly find itself in trouble if it runs out of capital. When it comes to SME finance, many small businesses unknowingly make common but avoidable mistakes that can disrupt cashflow and threaten success. Whether you're a start-up founder or a seasoned business owner, avoiding these top five cashflow pitfalls is key to long-term success.
1. Confusing profit with cash
One of the most dangerous misconceptions in business is equating profitability with business cashflow. Achieving profit doesn’t mean you have cash in the bank. Revenue might be tied up in unpaid invoices or inventory, leaving your business cash starved.
Tip: Use a cashflow statement alongside your profit and loss report. Track your actual cash incomings and outgoings to get a realistic picture of your liquidity.
2. Poor invoicing and payment collection
Late payments are a leading cause of business cashflow problems. In business, SMEs may often be late invoicing for their services due to being busy and lacking resources or failing to follow up on overdue accounts because they’re time-poor and their focus is elsewhere. This can instantly create a cashflow bottleneck.
Tip: Invoice promptly and implement clear payment terms. Consider finance solutions such as invoice finance to free up cash in unpaid invoices, and alleviate the burden of chasing payment so you can concentrate on running your business.
3. Overestimating sales growth
It's tempting to be overly optimistic about future sales, especially when things are going well. But relying on projected income that is yet to materialise could lead to overspending and poor decision-making.
Tip: Base your budgeting on realistic figures. Prepare for slower months and conserve working capital during your busier months.
4. Be ready for events that change the business landscape
Business owners are no strangers to disruption, and the Covid pandemic and world events have taught businesses to be agile. This preparation can make a huge difference when the unexpected happens.
Tip: Keep cash to one side for emergencies. If you’re considering upgrading business equipment and you have the capital to make the purchase outright, consider asset finance instead therefore avoiding draining your cash reserves.
5. Be sure to forecast
When it comes to managing cashflow, failing to plan is planning to fail. Without a cashflow forecast, it’s impossible to anticipate shortfalls or make informed decisions for your business.
Tip: Maintain a rolling 12-month cashflow forecast and update it regularly. Use this to make strategic decisions around hiring, investing, or taking on new projects. Explore your finance options thoroughly in case business finance is a better choice to fund your planned spending.
Managing cashflow effectively is about foresight, discipline, and adaptability. By avoiding these common mistakes, SMEs can reduce financial stress, build resilience, and seize growth opportunities with confidence.