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10 Common Cash Flow Mistakes And How To Avoid Them

Many small business owners will know that cash is key to a business’s survival. On the surface, it’s enough to know that as long as your income exceeds your outgoings, the business will be ok. But what are some of the common cash flow mistakes that small business owners make? I’ve rounded up my Top 10 here, and finish off with a few top tips on how to avoid them – plus a short 15 minute webinar summarising what you need to know.


1. Cash does not equal profit

Top of the list is assuming that cash equals profit (or vice versa!) This is one of the most common mistakes I come across as a small business accountant. Businesses who think that because they have money in the bank, they’ve made a profit, or that the cash in their bank IS their profit. If you business has made a profit, this profit is then used to cover tax liabilities, loan repayments, credit card repayments, asset purchases (such as a laptop, machinery or a vehicle). It may also pay for dividends to the shareholders in a limited company.


2. Overestimating future sales volumes

For a cash flow forecast for your own purposes, you should always err on the side of caution. Be realistic with your sales projections and if, after a couple of months, you realise you were way off target – revisit your targets and adjust them.


3. Low profit margins

This is especially true in product businesses but also applies to service businesses. The expenses that directly relate to your sales need to be factored into your pricing strategy. In a product business this could be:

  • the costs of materials
  • inventory
  • delivery
  • packaging
  • merchant fees and so on.

In a service business, it could be some software that is purchased specifically to carry out your service, any subcontractors or staff that assist you in the delivery of your service. If your Gross Profit % is not at the right level, you won’t have enough to cover the overheads in the business, or cover your drawings as a business owner.


4. Poor stock management

This is aimed at product-led businesses. If you don’t look after your stock, you will end up with wastage or money tied up in products gathering dust on a shelf. There are a few ways to improve stock control that I will cover at the end of this article.


5. Not having a budget

Your budget doesn’t have to be a rigid or restrictive budget – think of it more as a ‘spending plan’. If you overspend in one category – what category can you take the money from that month to cover the shortfall? You can obtain basic budget templates online where you can set a target, and review it with the actuals each month. This can prevent impulse spending.


6. Not having a cash flow forecast

It has recently become apparent that whilst a lot of business owners know that cash is important, that many do not see the importance of a cash flow forecast. Being able to anticipate cash flow dips can work wonders – both mentally and financially. Suddenly discovering you don’t have enough money to fund your VAT bill is not something you want to have to deal with (potentially every three months!).


7. Not having a buffer fund

In personal finances, many individuals would create an emergency fund. Small businesses are just the same. What will you do if your laptop suddenly blows up? Or you have to fix your website? Do you have the funds to cover it? You’ll often have to rely on expensive credit in order to fund these if you don’t have a buffer fund in place.


8. Poor credit control

Unpaid invoices are one of the key causes of poor cash flow. Money sitting in your customers’ bank accounts instead of yours is not going to cover your tax bill, pay your staff, or help you grow your business. Prevention is better than the cure, so make sure you have robust processes in place to ensure customers understand your payment terms and pay you on time. 


9. Growing too quickly

This can seem an odd one on the surface, but it is one of the big causes of cash flow issues. How will you cover the staff costs if you receive a large project to deliver? How will you cover the stock or materials purchase for a huge wholesale order? Before you take on a new client or project, you need to factor in if you’re in a financial position to deliver the work and, if not, your cash flow position might be better served by saying “no”.   


10. Poor internal controls

And to finish off, I’m picking a broad one – poor internal controls. This does in fact incorporate some of the above points, but if you don’t have good organisation, you will struggle with cash flow. Not having up-to-date or accurate financial information will cause significant problems, especially as you grow. If you take out a loan to fund a cash flow gap, but you don’t have the relevant information to know how it’s going to be spent, you’ll find it has quickly disappeared and you have nothing to show for it.

17% of all payments to UK-based small to medium-sized businesses arrive after the due date. 

Sage research

So now you’ve got my top 10 cash flow mistakes, here are a few things you can do to alleviate their impact, or prevent them occurring in the first place:


1. Get your financial information organised

Choosing the best accounting software can help you keep everything up-to-date and organised. The banks will send transactions through every 24 hours as a minimum (some are instant, some are every 4 hours). At Seed Accounting Solutions we recommend doing your bookkeeping on a weekly basis at the very minimum. This will ensure you can easily obtain all the information, whilst it’s fresh in your mind. (Daily is obviously better, but we understand that you don’t always have time to be doing bookkeeping when you’re the only person in your business!)



2. Outsource where possible

If you can afford it, outsourcing your bookkeeping frees up your time, ensures it is done correctly and accurately and makes things easier for when it’s time to do your accounts and tax returns. You can also use a product such as Dext to reduce the admin burden of manual data entry. In addition to having this information up-to-date, looking at it regularly is also important – checking profitability, margins, tracking sales patterns or growth – all of this will help you make the important decisions required to take your business forward.


3. Create a basic budget

We recommend starting with an annual budget: start with how much you want to take out of the business. Consider any loan or finance repayments. Add in your overheads. If you know your Gross Profit margins, you can then work out what revenue is required in order to cover the drawings, finance repayments and the overheads. Here’s a recent blog we wrote about how to budget during times of uncertainty. You may wish to go into more detail on certain expenses to ensure tighter controls.


4. Create a cash flow forecast

With your budget in place, you’ll now be able to create a cash flow forecast. As previously mentioned, Futrli Predict is a great tool that takes all the pain out of forecasting, but it will rely on accurate information in Xero. If you are running your business finances on a spreadsheet, consider creating a basic cash flow forecast on a spreadsheet as well. Don’t forget to include tax liabilities, loan repayments and interest. If you have payment terms on your invoices, don’t forget to consider how long customers take to pay you. I always choose to err on the side of caution, and overestimate expenses, and underestimate sales. This then gives a ‘worst case scenario’. Once your forecast has been built, have a look at the dips – how are you going to prevent these, what expenses can be reduced, how many more sales are required, what funding might be required?


5. Making getting paid as easy as possible.

Unpaid invoices can cause huge problems in small businesses. Negotiate payment terms, especially with larger companies. If you need payment within 30 days, don’t set your payment terms at 30 days – set them at 14. Give you customers as many ways as possible to pay you to reduce excuses. Make sure you follow up overdue invoices promptly, and regularly. An app such as Chaser can help if you use Xero or Quickbooks (amongst other software providers)


6. Seek professional help

There are plenty of different professionals out there who can help: bookkeepers, pricing consultants, coaches who specialise in retail/wholesale, accountants and virtual FDs. Most will offer a free initial call to discuss ways you can work together to achieve the outcomes you need.



If you want practical and interactive guidance on cash flow, try AAT’s recently launched short online course: The basics of cash flow

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Tamsyn Jefferson-Harvey

Tamsyn Jefferson-Harvey is a qualified AAT accountant specialising in small business tax and business growth services. She is the founder of Seed Accounting Solutions

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