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4 Cash Flow Mistakes to Avoid for Small Businesses

SMEs are a backbone of the economy, however the start-up survival rate is very low.

Why start-ups fail and what small business owners should do to increase their chance to succeed?

Read our tips and tricks specially prepared for smaller business owners to maximise their cash flow!

Dimitri Raziev
Dimitri
Founder, Kolleno
datepicker icon September 13, 2022

Running out of cash is the main reason why startups fail (38%) according to the Cbinsights report. So, there is no doubt that managing your cash flow right is a priority, especially for startups and small and medium-sized businesses. We at Kolleno strive helping companies succeed by helping them to become the masters of their cash flow. Let’s see what are the common mistakes the SMEs may unwillingly do and how to easily avoid them.

Mistake 1: Manual AR

Small business owners might think that doing manual work may help them save costs, or there is no need for an automated solution while the company’s size is not large yet. Performing manual accounts receivable work involves entering the accounts data into the spreadsheets, preparing the invoices by searching the relevant data, printing, and sending them to clients.

The sale was done, so you might think that the hard part is behind you, but you are mistaken. The job of receiving payment directly affects the health of your cash flow. Imagine how many opportunities for errors there are when AR management is manual. The employee may enter or retrieve the data incorrectly. The approval process is getting longer.

Additionally, the paper and postage costs increase as the sales grow. Not to forget the time spent by your employees actually tracking the sent-out invoices, the reminders, and so on. The invoice with errors requires additional work of fixing the error and repeating the whole process again. Also, this might spoil the relationship with your clients and may seem like a lack of professionalism. According to the AP Association, 54% of invoices were sent to the wrong address.  

The solution: Automate AR

Avoiding human error and freeing your employees off tedious tasks as manual invoice processing is simple. All you need is to automate the AR function. Thanks to the technology it is easier done than said. Modern-day business solutions offer customizable cloud-based Accounts Receivable Software. Kolleno has developed the machine-learning AR software extension compatible with the existing popular business tools. Our white-label solution will automatically retrieve the data from your accounting software and will prepare the invoice seamlessly and automatically will send them to your customers.

Mistake 2: Sending Invoices or Reminders Late

If you are sending the invoice late, then the payment will arrive almost certainly late. In order to get paid as fast as possible and decrease the Days Sales Outstanding (DSO), it is a must to send the invoice as soon as the sale was confirmed. Moreover, payment reminders are an integral part of credit control. However, instead of being puzzled about when to send the reminder or what is the appropriate wording for the message Kolleno is capable of lifting this pressure as well.

Solution: Automate Communication

Kolleno software extension is sending the invoice to a client as soon as the deal shows up in the books. This way the customer has more time to pay for the goods or services. Moreover, thanks to the machine-learning technology Kolleno software is able to estimate the best timing of when to send the reminder letter. The timing is based on the payment behaviour of any given customer to maximize payment success. The UK businesses spend around 56 million hours a year chasing late payments. With an automated solution, you won’t lose time that can be spent on direct responsibilities. Besides, the technology will suggest the most suitable tone-of-voice. Also, it will offer direct payment links and even may suggest spreading the payment all based on the historical data. The customer will receive the reminders via omnichannel communication means increasing the chance of receiving payment faster.

Mistake 3: Lack of Reporting

The business’s strategy and future success depend on planning and understanding the past and current state of your accounts receivable. If you do not possess the information about the payment behaviour of your customers and do not know the statistics of your cash flow, such as ageing reports it is very difficult to plan to maintain a healthy cash flow.

Solution: Automated Data Visualisation

Kolleno software will not only perform the duties of your credit controller but also will automatically visualize the essential accounts receivable data. On the user-friendly interface, you will be able to see the ageing reports- the breakdown of what is the proportion of your unpaid invoice. For example, your ageing reports show that most payments are late between 60 to 90 days. By discovering this you can think about adjusting your payment terms or introducing tougher customer credit checks before onboarding a new client.

Mistake 4: Not Preparing for the Crisis

Forecasting your cash flow is a good practice, however, it is essential to plan for uncertain times or crises. In order to survive in the long-term businesses, have to prepare the cash reserves when things go not according to the plan. It can be a loss of sales due to damaged goods, a problem with the supplier, or like we are experiencing now- the global crisis caused by the COVID-19 pandemic. In the UK the on-time payments have fallen to 41% as a result of the pandemics. The longer the cash conversion cycle, the greater the risks of paying your own bills late, which may lead to penalties and worsening relationships with suppliers.

Solution: Cash Reserve

Fixing internal liquidity, and optimizing your AR/AP is step one at any time. However, to withstand the external shock and avoid getting an unplanned loan, it is necessary to create a cash reserve that will save your cash flow. To do so, get a clear picture of what are your monthly expenses, and which of them are absolutely non-negotiable. Then try to build your cash reserve that would cover three to six months of your expenses. To do so, make the monthly contribution to the reserve and treat it as fixed spending. If you have spent some cash from the reserve, try to rebuild the desired level as soon as possible. Even if you are struggling to build the target cash reserve, remember that any money set aside is better than nothing.

Running a small or medium business can be stressful, especially for owners. However, there are tools available to lift the stress off your cash flow at least. Contact Kolleno today, and we will help your business to become stronger, by optimizing your cash flow!

Dimitri Raziev
Dimitri
Founder, Kolleno
Are you looking to centralize your payments, collections and reconciliation in one place? Book a demo to learn how Kolleno helps businesses to free up resources and focus on core priorities.