Five cash flow mistakes you're probably making (and how to avoid them)

Joel Svensson

We know you work hard and want to reap the rewards today so we’ve teamed up with Westpac to bring you tips and tricks on managing cash flow like a pro.


It’s not news that cash flow is crucial to the survival of any business. The ability of a company to meet its fiscal obligations as they come due is probably the most basic measure of its viability. But cash flow is a fickle beast, one that requires an array of different skills and tools to reign in.

This mix of necessity and complexity is a deadly one, causing some 41 per cent of all Australian small-business failures. No one wants their business to become a statistic, yet it happens to nearly half of us.

If you find yourself perplexed by your own cash flow situation, it might be time to wrest back control. Here are five of the most widespread cash flow mistakes – and how to steer clear of them.

Leaving invoices too late

Since cash flow is all about timing, a single missed payment from a client can put your business on the rocks. This is an especially pertinent risk for Australian businesses owners, living as they do in the slowest-paying country in the entire world.

Being profitable on paper is one thing, but having the money in your pocket is quite another. Letting receivables gather dust is a common cause of small business failure; healthy numbers alone can’t pay for premises or keep the lights on.

For this reason, it’s important to have standard timeframes for sending invoices and collecting payments. In the event a customer is late on a payment, having a follow-up system is essential if you don’t want them to make it a habit.

If you need to bill clients on-the-go, there are a number of free web apps that allow you to produce professional-looking invoices from practically anywhere.

A formal, accurate bookkeeping system is essential if you want to keep a handle on the ins and outs of your company’s money.

Not knowing where the money is going

A formal, accurate bookkeeping system is essential if you want to keep a handle on the ins and outs of your company’s money. While you might not think your business is large enough to justify such a system, just know that over one-third of failed small businesses reported poor bookkeeping as the cause of their downfall.

It might be tempting to keep all your accounting in-house, but investing in a hired bookkeeper might actually save you money in the long-run. Even small accounting slip-ups can have large repercussions for small businesses.

But if you insist on crunching the numbers yourself – or you just want to keep an eye on what your bookkeeper is up to – there are more than a few apps that will allow you to do both on the fly.

Not having a safety net

Setting up a cash-cushion for your business is acknowledging a few simple truths: you’re human, you can’t see the future and things will at some point go wrong. Bills get lost, invoices forgotten and clients flake out on payments.

When such occasions arise, having some emergency funds to draw on is an absolute must. In some instances, it could even make the difference between scraping through a shortfall and facing bankruptcy.

There are two basic options for setting up your safety net. The first is to start making regular deposits into a high-interest savings account; this will serve as your emergency cash when times are lean. This option has a long incubation period, but is very safe.

The second option is to get a line of credit from your bank. This method carries costs, but avoids tying up capital in a savings account, and takes far less time to create. (If you do decide on this route, just make sure it’s to help your otherwise profitable business survive a drought, rather than propping up a failing enterprise with borrowed funds.)

Having a good understanding of your overheads and their payment terms will also help you to be strategic about which bills you pay and when.

Losing track of overheads

Staying abreast of your payables is key. Not only do you not want to be surprised by a nasty bill between paychecks, you also want a clear understanding of operating costs; this essential to having a viable pricing strategy. You might be raking in money on the regular, but how much of that money is flowing back out the door?

If you don’t know, it might be a good idea to speak to your accountant and vendors. Get a firm grasp of your business’s needs, cut the fat where possible, and reassess your pricing. It’s always good to be on the lookout for better deals.

Having a good understanding of your overheads and their payment terms will also help you to be strategic about which bills you pay and when. Paying a bill two weeks early because you just happen to have money in the account might seem smart at the time, but delaying that payment for another 13 days might have allowed you to avoid an overdue charge for a different bill.

A good rule of thumb is to max out your payment terms, but never go beyond them. You want to give yourself as much time as possible, but you’ll also want your suppliers’ trust if you ever suffer a shortfall and have to ask for an extension.

Getting trapped in the invoice-marketing cycle

It’s a common pattern for small businesses, especially contractors and piece-work traders: you find a client, you complete the job, the money comes in, and the search for clients starts again. In the meantime, you’re burning through the money you just made, and by the time the next job comes along, it’s all but gone.

This boom-and-bust rollercoaster can make cash flow management extremely tricky. By concentrating solely on getting the current job done, rather than setting aside time to line up the next one, businesses back themselves into a corner where they are forced to live paycheck-to-paycheck, and cannot accurately anticipate when they’ll be able to make good on their obligations.

It’s important that small companies be constantly on the lookout for new and better clients. Staying in contact with past and potential customers is crucial; when they’re ready to buy, you want it to be from you.

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Joel Svensson

Joel Svensson is a Melbourne-based freelance writer specialising in politics and business.