Cash Flow management is a method of tracking, evaluating, and optimizing net cash revenues versus cash expenditures. The calculation of net cash flow is extremely critical for the economic stability of any business. This is a crucial component for any industry because many companies fail only because of poor cash flow analysis.
If you ever see your company or business to spend more than it acquires, then it would be evident that you’re having a cash flow management issue. Here are six deadly cash flow management mistakes that can kill your business:
– Inaccurate Calculation Of Profitability:
In the e-commerce market, one of our customers sells smartphone devices. He purchases the products from his suppliers and sells them at a margin of 40%. For example, he buys a headset for $6 and priced it at $10. He always assumed that he was making a 30-40% profit on each deal.
But that was merely his belief that he is earning good profit. In reality, he was losing his revenue by not considering the market commission, exchange expenses, dispatching cost (that was different for each order), cost of storing stock, and above all – return expenses. He was shocked when he prepared his balance sheet at the end of a year.
Very often, companies assume that every transaction they enter into is giving them the profit they have in mind. But unfortunately, most organizations or businesses face serious cash problems, because they have too many overheads.
Sometimes, even a safe, cash-rich business spends a lot on a big office or invest too much in fancy things, rents, services, etc., and sees them as insignificant or trivial at the beginning and good for the base of their business.
Conversely, when the business gets into a tough time, they often find it challenging to maintain such excessive extra costs and ultimately lose cash quickly if they continue to keep the business in a fancy way. Or they think if they stop being fancy, their customers lose interest or trust in them. Hence a cash-rich business can become a cash hungry business in a short period of time.
Considering these costs is vital for the wellness of any business or organization. A company can only make a profit if they have sufficient cash left in their accounts after paying off all costs and expenditures.
– Neglecting Seasonal Nature of the Business:
This is related to specific companies that don’t have a year-long operation. These companies find themselves extremely cash-rich during their busy periods and, but on the other side, face difficulties in managing daily cash flows in low seasons.
Because when the cash-rich season starts, it tends to lead to overheads that are tough to sustain during off-season periods. In contrast, these off-season periods result in deals and discounts that reduce margins to maintain a certain level of profit.
There should be sufficient arrangements for these slow times of the year in your cash flow management scheme. For, e.g., Marriage seasons see a ton of deals in Jewelry and Clothes.
Yet, for the remaining year’s time, the deals should deplete quickly, bringing about a more prominent cash overflow. There should be a plentiful sum saved for fixed costs to be acquired.
– Cost Of Bad Hiring:
This has harmed us on different occasions in the past, and it is our personal experience. We recruited three salespersons from a credible organization. Their resumes were completely glorified with accomplishments. They requested a 30% rank, and we accepted. We spent the first month training them. We hoped that our profits would at least double, and their skills will benefit us when they start selling.
After the first month of training, we hoped the best, but next month, nothing happened. Unfortunately no deals from these new employees. We figured that they might require some more time to adjust themselves and looked forward to one more month. But unfortunately, they accomplished scarcely 10% of their target. In the fourth month, the very same thing prevailed.
Eventually, We had to other choice to let them go.
Did you see what actually happened here? Not only we could not reach our revenue goal in these four months, but additionally, we lost much money on their areas like training, salaries, and other expenses that seriously affected our cash flow in these four months.
Later on, we did have a better recruitment process, but the issue is that the cost of wrong hiring can actually make a difference to your cash flow that may not be known to you and can cause real damage.
As you can see there are mistakes that can cause huge costs to your company’s performance. At ZAD Consulting group our seasoned experts help businesses to dig into their numbers and reduce operational costs and reduce wastes.
Author : Arash Zad