Cash flow management is essential to any business. An inadequate understanding of critical financial business principles can lead to poor decision-making and failure. In this article, Ferrari Energy explains the ten biggest cash flow management mistakes that new companies make.
Overestimating sales: This is a common mistake for startups. Full of optimism, new owners see a rosy sales outlook that can be unrealistic. Remember, earning a share of the market will be hard work. The competitors currently serving the market will not give up sales easily.
Underestimating costs: Everything you need, from office supplies to raw materials, will cost more than you anticipate—plan for rising prices.
Too much debt: Easy credit is a tempting lure. Some debt is inevitable and can even be wise, but becoming saddled with more debt than your company can manage is a common cause of business failure.
Underpriced: Another temptation comes in the form of pricing your goods or services so low that you easily win all the business you want. You can generate a ton of revenue by being the low-price leader, but if, in the end, you are not profitable, that strategy is unsustainable.
Insufficient monitoring: Some companies fail to put tools and strategies in place that allow them to monitor cash flow regularly. Especially when your company is new, you need to have an accurate cash flow picture constantly.
Insufficient emergency account: It is dangerous and can be fatal for a startup to assume that everything will go as planned. All it takes is one unfortunate event, and if your emergency account is underfunded, you may not be able to recover.
Receivables aging: You want your customers to be happy, and you hate to pressure them to pay, but that may make you the last to be paid. Many companies will postpone vendor payments as long as possible as a regular practice. They will only pay after exhausting all avenues for delaying. Set reasonable receivables policies and enforce them.
Unrealistic view of profit: “Don’t count your chickens until they hatch” is the old saying. Lots of sales and significant revenue can lead new owners into complacency. Profits are what counts, so make sure you know how much of each sale is actual profit.
Poor inventory management: Inventory management is critical and can be tricky. If you have too much inventory, your money is tied up when it is needed elsewhere. If you have too little inventory, you run the risk of creating unsatisfied customers. You can save money when buying in larger quantities, but the cost of the funds needed to run your business may eat up those savings.
Unmanaged growth: Growth is a good thing. This trap has crippled many a new company owner. Yes, growth is a good thing, but it must be managed growth. In most cases, the debt acquired to fund growth increases faster than the profits that follow. That lag time between debt payments and profits must be managed to stay afloat.
Ferrari Energy is a family-owned private oil and gas company focused on mineral and leasehold acquisitions. Founded in Denver, CO, by Adam Ferrari with a focus on educating landowners, Ferrari Energy has consistently served the needs of the landowner community in the basins in which it works. Its operation covers several areas throughout Colorado, Wyoming, Utah, and ND. Ferrari Energy has provided oil and gas leases to over 850 homeowners and held multiple lease signing events to accommodate the residents of Broomfield, Colorado.