A company’s survival and smooth running are closely linked to effective cash management. SMEs are particularly vulnerable to this problem, as they often have limited financial resources. Errors in cash management can have disastrous consequences, even leading to business closure. In this article, we’ll take a look at the most common cost and expense management mistakes made by SMEs, so that you can avoid them and ensure your company’s long-term survival.
Not anticipating cash flow
The absence of cash flow forecasts can prevent a manager from taking a long-term view of his business. Cash flow forecasts are essential for informing and anticipating future cash flow difficulties. Failing to draw up a cash flow plan is tantamount to groping your way forward. To be effective, a cash flow plan must be updated regularly throughout the year. It’s a dashboard that needs to be consulted regularly and updated in line with objectives and actual cash flows.
With this in mind, you need to be careful not to be too optimistic. Overestimating sales volumes when drawing up your cash flow plan could precipitate the company into a delicate situation. It is also essential not to confuse high sales with a positive cash position.
In short, drawing up a cash flow forecast is essential for managing your cash flow and your business in general. Regularly monitoring and adjusting your cash flow is essential for an objective view of the health of your business. It is crucial to anticipate future cash flow difficulties by taking the necessary measures before they arise. Finally, it is important to be cautious and realistic in your forecasts to avoid cash flow difficulties.
Inadequate management of payment deadlines
One of the thorniest issues for any company is managing payment deadlines. Actual cash flows are taken into account in cash management, so it’s vital to continually monitor levels of charges and expenses, and set down payments to avoid unpleasant surprises.
If a company makes a lot of sales, it can suffer a sharp drop in cash flow if payments are slow to follow.
A common mistake is not to pay enough attention to payment terms for trade receivables and payables. Long payment terms for customers can be counter-productive. While implementing such a flexible payment policy can be beneficial and provide a degree of flexibility, it can have negative long-term consequences if not managed properly.
On the other hand, poor management of supplier payment deadlines can put cash flow under pressure. A business owner who does not negotiate sufficiently with his suppliers may find that payment terms put his SME under pressure. It’s important to weigh up the advantages and disadvantages of a more expensive supplier offering advantageous payment terms against a cheaper supplier who is not flexible when it comes to payment terms. In this sense, it’s worth noting that payment terms and deadlines are just as important as the price itself.
Underestimating the potential of innovative solutions
Managers of small and medium-sized businesses often manage their own cash flow. However, they are often very busy, with many tasks to complete in a single day. Since managing costs and expenses is an essential task for the management function and cannot be neglected or postponed, if it is badly managed, it can be dangerous for the company.
That’s why it’s advisable to call in an expert to minimize the time you have to devote to this task. It’s true that you don’t necessarily need to be a chartered accountant to manage cash flow, but it does require rigor and attention to detail.
Another solution is to use the right tools to avoid errors and time wasted on redundant tasks. Excel or any other spreadsheet program can be a basic solution, although managers can also use tools specifically designed for this task.
Poor inventory management
Poor inventory management can lead to financial problems for the company. Stocked products represent tied-up capital, which means that money is tied up and cannot be used for other needs. What’s more, excessive stock levels can lead to massive storage and retrieval costs, which can reduce the company’s margins. In addition, it can lead to discounted or loss-making sales, which may temporarily improve cash flow, but negatively affect long-term profitability. If stocked products are perishable or out of fashion, their value will rapidly decline. On the other hand, insufficient inventory can lead to stock-outs, which can frustrate customers and affect sales, putting cash flow at risk. The ideal situation would be to achieve an equilibrium that reflects good inventory management.
Neglecting to improve profitability
It’s common for companies to see their expenses increase as they grow, which can lead to cash flow difficulties, especially if nothing is done to eliminate irrelevant expenses. These costs can be reduced by renegotiating contracts with suppliers and adopting new, more economical practices, such as electronic document management. In addition, small and medium-sized businesses can increase their sales by raising selling prices or improving their visibility on social networks. It is also important for managers to analyze their competition and better understand their customer base, so as to adapt their offer accordingly.