Cash is king in the business world — especially when you have a company to run. Even if you have money on paper, having access to actual cash is necessary to keep your business functioning efficiently and effectively. Too many startups make mistakes with their cash and find themselves floundering. Safeguard your business by avoiding the following pitfalls:
Not Anticipating the Unplanned
There is nearly a 100 percent chance that your business will experience an unplanned and unanticipated expenses. Whether it’s a key component that fails, a vital member of your team that leaves or a natural disaster like a flood, you need to have the cash flow to handle the unexpected issues.
Equating Profits With Cash
It’s easy to think that just because your business is turning a profit that you’ll have the cash flow to match. If your business is like many others though, your first order of business is to reinvest everything you make back into the business in an effort to fuel growth. While this is an admirable strategy, the fact of the matter is that cash is the only sustainable way to pay your bills.
Better Growth Than You Expected
This pitfall might seem like an oxymoron: Growth generates profits, so it seems like you should have plenty of cash. As noted above, though, just because your business is profitable and growing doesn’t mean that you have the cash you need to keep up with that growth. The costs of building products, funding staff salaries and expanding into better facilities can’t wait until your revenues and sales catch up. You need to have a source of cash to fund them and meet the demand or else your customers will go elsewhere.
Sales fluctuations are a normal part of doing business, but they can put you in a bind. Because you have to maintain more inventory, that means more of your company’s budget is tied up. Beware of trying to vary your employee base too much to match the ups and downs of your sales. You’ll soon find that your cash flow takes a hit due to the hiring and firing cycle that can get expensive.
The bottom line is that your company needs to have a dedicated allotment of cash that is protected from all other budgetary demands. It’s the only way to ensure that your organization is able to scale up to the next level.