5 Common Cash Flow Management Mistakes to Avoid

5 Common Cash Flow Management Mistakes to Avoid

Cash flow means the inflow and outflow of funds that are necessary for a firm to function efficiently. Even though there are other business aspects, including sales and manufacturing, that companies have to look after, they still should not overlook cash flow management. This is because the success of a company depends heavily on its ability to manage its finances, particularly the flow of cash.

There are five common mistakes that business owners make while managing their cash flow. These mistakes will obviously seriously impair the ability of any company to run its business operations smoothly.

In this blog, those commonly made mistakes that the companies need to avoid are mentioned below:

·       Lack of Frequent Cash Flow Monitoring
Keeping track of all the data that businesses create may be stressful for business owners. However, there may be serious issues later if cash flow is not routinely monitored. Businesses risk overspending or missing out on development possibilities if they don't have a clear picture of their cash flow condition.

·       Lack of Initiative in Collecting Payments
Invoices only provide an estimate of future income. To realise this income, businesses need to collect the payments owed to them by clients. This is where many enterprises fail, as they passively follow up with clients to collect payments. Many clients do not prioritise giving the payments to those companies on time that lack initiative in collecting them proactively, which could result in late payments.

This payment delay has an impact on cash inflow, and the management of this flow can be significantly negatively impacted by this. Companies can therefore find themselves short of money for important endeavours like manufacturing and growth. This can potentially result in a financial crisis if it persists.

·       Lack of Clarity Between the Terms Revenue and Profit
Many people often confuse revenue with profit. While both are crucial financial metrics, they represent different things. Revenue is the total amount of money a business earns from its operations. It is the income generated from selling goods or services. Whereas profit is the amount of money a business earns after deducting all expenses from its revenue. All of this means focusing solely on revenue without considering expenses can lead to cash flow problems.

·       Exaggerating the Potential Sales
Businesses frequently overestimate their anticipated revenues due to optimism bias, which can enhance the inaccuracy in cash flow. Businesses can use these estimated income estimates to make important financial choices, including overstocking, investments, or debt repayments; therefore, this error might have negative consequences.

·       Inadequate Cash Reserve
Unexpected payments or repairs are examples of inevitable expenses that can swiftly upset the cash flow of a company if there is no reserve to pay for them. Missed payments, late fines, or even the inability to continue operations might result from a lack of cash reserves.

All of this clearly presents how these mistakes can negatively impact the operations of any business. These problems can be avoided by using various kinds of tried and tested methods, such as hiring a new team, being more proactive, etc. But the method that can actually be effective is bill discounting. 

A kind of invoice financing known as bill discounting involves issuing money against outstanding selling invoices. The vendor receives a reduced advance from the banking institutions. No assets need to be pledged as security by the company. Unpaid sale invoices serve as the basis for loan advancement.

On November 24, 2015, three businesses received "in principle" clearance from the Reserve Bank of India (RBI) to establish the Trade Receivable Discounting System (TReDS) platform. In accordance with the Payment and Settlement System (PSS) Act of 2007, Mynd Solutions Pvt Ltd is one of three firms that established the TReDS platform "M1xchange" on April 7th, 2017, to enable MSMEs to discount invoices and bills of exchange on a PAN India basis. By turning their trade receivables into liquid money on a no-recourse basis, it helps MSMEs access funding. 

Conclusion 

Effective cash flow management is essential to every company's success. By staying away from these typical mistakes, businesses can save themselves from financial losses. Bill discounting can be a method that can help in avoiding these problems.

To facilitate the discounting of invoices and bills of exchange across India, the Reserve Bank of India (RBI) approved the establishment of M1xchange TReDS, a digital marketplace that connects businesses with banks and NBFCs.

 

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