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7 Cash Flow Mistakes Every Entrepreneur Makes In First Year

by Lottar

Everyone starts out thinking they know it all, only to discover soon enough that they really don’t know anything – and you can start this process all over again when you take the plunge into the entrepreneurial world. The early stages are full of confusion, a mix of anxiety and misplaced confidence, and so many mistakes.

However, most of the bugs are tolerable, and they end up being extremely useful. After all, you learn more from failures than successes, and if you could somehow manage to skate through your startup phase without a care in the world, you’d only really be setting yourself up for a much worse battle in the future – and on a much more damaging time.

But that doesn’t mean you’re bulletproof. Make enough mistakes in certain areas (especially financial), and you can run your business into the ground before it’s had a real chance to grow—and the biggest of those areas is cash flow. Cash flow weighs the money you make versus the money you spend, and if you keep the latter outpacing the former, your company could collapse (even if you’re technically profitable). That’s why you have to be vigilant.

That’s why the best thing you can do is read up on what tends to go wrong. This way you can ensure that you don’t make the same mistakes (at least not all at once). To that end, let’s look at 7 cash flow mistakes entrepreneurs tend to make in the early days:

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1. Ignore it completely

It’s the simplest and most obvious, but that doesn’t stop it from happening: some entrepreneurs get so caught up in the excitement of the road ahead that they completely overlook their financial situation. They assume that everything will work out monetarily if they make their businesses strong enough with compelling products and/or services.

Of course, this is not so. You can create a company that is extremely impressive on paper, but if you don’t balance your books, you’ll never get a chance to take full advantage of that quality. You’ll run out of funds, close, then wonder what went wrong. It all looked so promising. Since the right conditions for building a business don’t come along very often (that perfect ground of financial support, availability, will, passion and creative purpose), you shouldn’t waste it.

2. Becoming fixated on profits

Profit is not everything, even if it surprises many people. In the long run, this is the most important thing, but a profitable deal cannot always save your business. It’s all about time frames. Imagine this scenario: you spend most of the money you’ve saved on products you’re going to sell at a 60% markup, and you’re 100% sure the deal will go through, but you’re not sure exactly when .

While you wait to recover your money plus the big profit, you make a few customer payments, and your savings are wiped out. Suddenly you can’t afford to keep the lights on, and you don’t get back on your feet until you get the profits from that big sale. Despite arranging a fantastic deal, you ran aground because you couldn’t last long enough. Remember that you are running a marathon, not a sprint, and it is the long term that matters.

3. Failure to value time

As an entrepreneur with the skills needed to run their own business, you are obviously quite a talented and capable professional. This means that your time is valuable—valuable enough that you should definitely ask for a consultation if you were to provide one. So how should you spend your time? Should you take a whole day to handle a task that can be automated just to save money on the software solution?

Of course, there are certain tasks and projects that require close attention, while others represent a totally inefficient use of your time. For example, a SaaS business owner can rightfully devote their schedules to improving their product or generating new sales leads, but they rarely need to concern themselves with the intricacies of cyber security or server maintenance: for that, a reliable yet cost-effective SaaS can be hosting provider like Cloudways, to ensure they can focus on business growth and not technical complexities.

4. Not optimizing scheduling

When you’re dealing with regular payments (whether they’re weekly or monthly), there’s always some wiggle room with the payment schedule. This is completely normal and makes a lot of sense

sense because businesses do not adhere to the same work patterns and cannot always pay (or receive payment) on specific dates.

Where entrepreneurs go wrong is not rearranging schedules to make their lives easier. If you have several large payments to make each month, and you allow regular customers to pay you after those payments, this is a clear mistake that can lead to your cash flow drying up. Ask clients to pay as early in the month as possible, and move your due dates to be as late as possible (if you have any staff, use software to automate payroll for the last day of each month). In the event of a cash flow crisis, this will buy you time.

5. Spend carelessly

Get pizza delivered for lunch every day. Shop the latest and greatest pieces of office equipment. Spend large sums on social gatherings for friends and family members. Getting a company account can be extremely dangerous for some entrepreneurs, making them feel rich and leading to a lot of money being wasted. The solution is not easy, but it is extremely simple: cut the waste. Stop spending frivolously. Limit the business account to essential expenses.

Your money should go towards investing in your future: namely recruitment. Save most of your profits, and use the rest to bring in the best talent you can find. A well-chosen apprentice today could be your company’s most valuable asset in 10 years.

6. Not charging enough

You have to be careful with your first customers because they have a lot of power over you. Often you actually owe them to some extent – maybe they gave you opportunities in good faith when no one else would or put up with some teething problems. That’s completely understandable, but what isn’t is failing to ask for what your business is worth (but many entrepreneurs make a habit of being modest about their operations).

It’s a curious psychological quirk that every customer will take a cue from you when measuring the value of whatever you provide. If you ask for a large amount, they will assume that you are worth it. If you ask very little, they will think you are only worth that much (if you were worth more, you would ask more). So while you shouldn’t charge too much, make sure you charge appropriately – if in doubt, look around at comparable companies and see what they charge.

7. Being too lax with invoicing

Like not charging enough, some new business owners become afraid to push their customers for payment. They don’t want to rock the boat, so they allow themselves to keep putting it off. This is simply unacceptable, and if you want any long-term success, you need to address the matter as early (and as decisively) as you possibly can. A study of businesses in the UK found that a third of SMEs dealing with late payments faced payments that were more than two months overdue.

Every invoice you make should include clear payment details and numerous payment options to make it harder for the payee to find an excuse. It should also include a deadline, as well as information about what will happen if the deadline is not met. However, stay away from generally having one point of view on late payment because every customer is different. Retailers sort their customers using buyer personas because they know that customers have different preferences and behavior patterns – you need to learn from this.

It might be okay to make one or two of these mistakes. Do they all? This is a death sentence for your business. Avoid as much as you can, and it will greatly improve your chance of seeing a second year.

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