8 common Cash Flow mistakes (and how to prevent them)

Cash flow is the lifeblood of any business. It refers to the circulation of money coming in and going out. Cash flow management is critical because it lets you see if you have enough cash to cover your bills, invest in growth, and weather unexpected challenges.

Without sufficient cash flow, even profitable businesses can struggle to stay afloat. By effectively managing cash flow, you can make informed decisions, avoid financial strain, and set your business up for long-term success.

In this blog, we will run through 8 of the most common cash flow mistakes, with advice on how to prevent them.

1. Late Paying Customers

One common mistake is receiving late payments from customers. 87% of businesses are typically paid late, and an average of 56.4 million hours are wasted every year by UK businesses chasing late payments.

A solution to this problem is to be proactive. Having a clear process in place to deal with your debtors is critical. It is essential to establish a policy to get these payments in. This could include following up with the customer before the due date to see if they have received the invoice, if they have any questions and when you are expected to receive a payment.

Any issues must be solved before the due date; the quicker you follow up, the faster you will get paid. Chaser is a Xero add-on solution that can automate a lot of this process so that you can spend less time on routine invoice chasing while ensuring consistency.

2. Using only one communication method to follow up with customers

Using a combination of different communication methods can increase a business’s chance of getting paid within a week of the invoice due date by over 50%!

Emails are best for providing details and documents, phone calls are best for solving any issue, and text messages/WhatsApp are the quickest way to get in touch with customers for a quick reminder.

Tailoring your communication method to suit how your customers best communicate is a great way to solve this problem. Sometimes, a quick prompt/reminder can increase a business's chance of getting paid on time.

3. Not making it easy for the customers to pay

This is a problem that is overlooked the most. Most business owners are all about being time efficient, and making it quick and easy to pay a bill will increase the chances of it being paid faster and on time.

Ways to make payments easier is to:

Set up direct debits, e.g. by using GoCardless.
Online invoice payment services such as Fumopay can then include a ‘pay now’ link on your invoices.
Integrate Apple Pay or use a solution like Fumopay – this prevents customers from having to manually enter their bank details and invoice references to make a payment.
Consider early payment discounts to encourage customers to pay faster.

4. Not having enough cash reserves for unexpected bills

Although this is hard to predict, regular checks on the cash flow can make you aware of any unexpected bills which have been received or paid out. Giving you time to top up the cash reserves.

Consider keeping a separate bank account to build a reserve for those unexpected costs. Saving a small amount regularly can build this pot up without it being a noticeable withdrawal. This method could also be used to save for VAT/Corporation Tax so that the impact on day to day cashflow is less.

5. Manual errors in processing

It is so easy to make a manual mistake when processing an invoice. It takes even longer to check everything that is processed for these errors.

By automating this process, with a Xero add-on such as Dext, you can push your invoices through at once, and Dext will pick everything up on the invoice and publish this into Xero.

This not only reduces the risk of manual errors but will also save a business time on inputting invoices one by one and storing the copy of the pdf against the transaction.

6. Delayed Supplier Payments

Do your suppliers offer early payment discounts?

This can help your cash flow as having a plan as to when you are going to pay your recurring bills enables you to make sure there are enough cash reserves to use. Taking advantage of early payment discounts helps you save money by being more time efficient. Have a strategic plan in place to run these payments quicker.

7. Forecast & Re-Forecast

This shouldn’t be a one-off!

Many businesses get confused about the difference between a budget and a forecast. A budget is all about spending control and the anticipation of what will come into the business, whereas a forecast will tell you when this cash will hit the company.

Keeping your forecast up to date can help you understand when you have the funds to pay for bills and allow you to plan for periods of difficulties in advance.

Consider using a Xero addon such as Fathom to make this process easier.

Ensure you review actuals vs forecast. Whilst a forecast will always be wrong (as it is an estimate of a future period), it shouldn’t be miles out unless something has changed. Reporting on this allows you to review the results and the difference to what you were expecting to happen.

8. Lack of Planning, Action & Accountability

Cash can be impacted significantly when unexpected events occur that have not been planned for.

It is important to explore different scenarios when forecasting. Some of this may be related to events outside the control of the business e.g. can your business accommodate for unexpected scenarios like a spike in interest rates?

Or areas that are in control of the business e.g. What is the impact on cash if we reduce debtor days? Or what happens if we launch a new service line/hire a new staff member?

Forecasting can also help identify where the business’ blind sides are and can help put in a plan of action so cashflows are impacted less.

Following the forecast it is important that these scenarios are reported on and reviewed, as well as documenting any action points required ensuring those responsible stay accountable.