Small business owners are often overloaded with tons of activities revolving around their situs slot online business, and they have very little time left for managing cash flows or scratching their heads on company’s finances. On the other hand, mismanaging your company’s funds might lead to total failure of your business.
Even though you have the brightest of ideas and your company is on the growth ride from the very first day, it is often seen that 80% of the businesses, big or small, fail or close down, just because they cannot manage their cash flows.
To add to the injury, certain hidden costs or expenses have an adverse impact on the cash flows, which are very tough to manage since they cannot be perceived.
In this article, we run through some of the deadly cashflow mistakes that can really hurt your business. Find out if you are making one of these mistakes and learn how to avoid these.
1) Forced Growth
One of my friends who runs a software development company started experimenting with Facebook ADs. In first month itself, he got good returns on his investment. He immediately increased his AD spend by 5 times anticipating 5x growth in sales.
Well, that didn’t happen. He did generate more leads but not in proportion to the AD spend. He spent more than he earned in that month and ended up screwing his cashflow. He had to take short term loan to cover up the month’s expenses.
It is a good thing for a company to have a great growth story, but sometimes to have excessive forced growth can spell doom for the business.
What’s forced growth? It would call for more cash to be paid to the staff, bigger office for accommodating more people and clients, a rollout of new products, higher than needed AD spend, etc. that would call for greater expenses.
These are effort-oriented tasks that need to be handled rapidly as loss of too much cash will severely affect your day-to-day operations. These extended services bring in more revenues, but with revenue comes in more cash outflows. Efficiently estimating these cash outages in due course of time can help you prepare for exigencies.
2) Spending Too Much on Sales
As a small business, it is impervious to fetch new customers, even at the cost of incurring losses. There are two metrics to identify whether your client is bringing you the profit that you anticipated. One of them is the ‘Acquisition Cost’ of the customer, which is the amount spent on gaining one customer.
The other is the ‘Lifetime Value’ of the customer, which is the total revenue generated by a customer over its lifespan. It has to be ensured that the Lifetime value must be greater than the acquisition cost. In this way, a positive effect is felt on the cash flows of the company.
Overspending on the acquisition cost might lead to gaining a small customer with a very limited return. Many businesses falter on this point as they perceive that more the customers, more the profit.
There are lot of hidden elements to the acquisition cost. For example, salary of the sales person, amount spent on his mobile and internet connection, cost of his seat in the office, his commissions, etc. You need to add up all these indirect costs to correctly calculate customer acquisition cost.
If you don’t do this, you’ll unknowingly start burning more money than you earn and eventually affect your cashflow.
3) Incorrect Calculation Of Profitability
One of our ProfitBooks customers sells mobile accessories on ecommerce marketplaces. He buys the stuff at 40% margin from his sources. For example, he buys a headphone at Rs. 600 and sells it at Rs. 1,000. He used to always believe that he was making 30-40% on every sales considering minor expenses.
But when he prepared his balance sheet at the end of an year, he realised that he made losses. He did not consider the marketplace commission, transaction fee, shipping cost (which varied for every order), cost of storing the inventory and most importantly – cost of returns.
Many-a-times, businesses feel that there is enough profit from every transaction they enter into. However, businesses of all sizes run into severe cash problems because they have committed too much on overheads.