Cash flow is one of the basic elements which keeps a startup running successfully. Such setups often start with limited cash and resources, so protecting what they have at hand is even more crucial. Spending all the cash on supplies and waiting for sales or accounts receivable can lead to poor cash flow.
There are numerous cash flow mistakes startups commit in the initial stages due to a lack of experience. Poor management and lack of professional support are the major issues behind it. Investing in accounting software can resolve ninety percent of the issues of the setup. For the rest, you must figure out the issues and implement suitable strategies for resolution.
Dig deeper into the details of this article to learn and explore the cash flow mistakes common among startups and take appropriate measures to avoid them.
Top 6 Cash Flow Mistakes Startups Must Watch Out
Smooth and steady cash flow is necessary to keep a business up and running efficiently. It is specifically crucial in the case of startups, as they have limited resources and experience too. The startups often commit grave cash flow mistakes, which affect their whole setup and cause irreparable loss. Learning and avoiding basic mistakes can prove significant help in the long run.
Here are the most common cash flow mistakes startups must watch out for to avoid earning loss instead of profits.
1. Failure to Keep Separate Bank Accounts
Failure to keep separate bank accounts is the basic and most prevalent cash flow mistake startups often commit. Opening a separate business account as soon as your startup starts rolling should be the norm. It should never be connected to your personal account as it can lead to numerous complications and issues later. It can also cause issues and confusion in record keeping, so do not take it lightly. Many startups choose separate accounts in the initial phases of launching their setup and ensure smooth record-keeping with separate personal and business accounts.
2. Ignoring Invoicing and Cash Cycle
Ignoring invoicing and the cash cycle is the next cash flow mistake startups should avoid at all costs. At times, startups buy inventory from suppliers. They try to buy as much as possible or secure a contract to manage their sales cycle without a halt. They often end up accepting the terms and conditions of the supplier while overlooking the invoices and their cash cycle. It can result in more stock in their inventory until the end of the month or the contract. In other words, they will be cash-strapped with more inventory and fewer buyers. So, following cash cycles is crucial.
3. Overlooking Payment Timing
Overlooking the payment timing is the next cash flow mistake startups should specifically avoid. Not getting timely payments from the clients can lead to late payments to suppliers and delays in supplies. It will negatively impact the overall business cycle and cause reputational and financial loss. Investing in accounting software is one of the best options for startups as it generates reminders for accounts payables and receivables for all the stakeholders. It will remind the clients to clear payments without making them feel embarrassed or awkward and regulate the payments.
4. Investing Without Thinking Thoroughly
Investing without thinking thoroughly is the next cash flow mistake startups must avoid at all costs. Some entrepreneurs are tempted to put more effort and sources into their marketing efforts, so the setup is an instant hit. However, it is only possible when your setup has reached a certain level of maturity and offers higher value to the consumers. So, you must first spend on developing your setup efficiently and then channel the energy and resources into marketing. Doing it in reverse order may only cause irreparable loss, so do not make hasty assumptions.
5. Limited Expense Justification
Limited expense justification is another common cash flow mistake startups must watch out for. Such setups usually have limited resources, which they must spend or invest quite cautiously. On the other hand, they might be tempted by some expenses to grow their business. If you end up spending without any accountability, your business will soon face loss. Therefore, you must justify every expense before spending. Check if it will add value to the setup in the long term. If the answer is no, you must be able to give up on it and protect your finances and investment dearly.
6. Poor Tax Expense Tracking
Poor tax expense tracking is the last cash flow mistake startups must watch out for. In the initial stages, the business is not often established enough to pay high taxes. Still, it is enough to cause concern and worries to authorities regarding tax calculations. Complying with tax requirements also becomes a challenge, on top of ensuring perfect tax record keeping. Accounting software offers undaunted support in tax compliance by ensuring smooth calculations and record keeping. You can pick the best accounting software in UAE to track and manage your tax expenses smoothly.
Are you guilty of committing cash flow mistakes?
Poor management and lack of expertise can make you fall into the trap of cash flow mistakes. However, you must not make it a practice. Invest in the best accounting software to manage your records efficiently and ensure smooth cash flow, which leads to higher profitability.
