7 Deadly Cash Flow Mistakes to Avoid in Your Cleaning Business

One of the number-one reasons companies fail is cash-flow mismanagement. In fact, inadequate cash reserves (also called running out of money) is the final nail in the coffin of more than 80% of businesses.

Nothing paints a clearer picture of a company's health than how much it earns vs. how much it spends. That's why a business owner's most important job is to understand and monitor the money that moves in and out of their company.

Cleaning Business Cash Flow Mistakes

To avoid the kinds of costly cash flow mistakes that shutter businesses, avoid these seven deadly sins.

1. Winging It
If your “bookkeeping” is a folder filled with receipts or a haphazard Excel spreadsheet, you're not alone. Many entrepreneurs simply wing it when it comes to finances. While it's not uncommon, it's a good way to end up in hot water with cash flow (and possibly the IRS).

Don't rely on mental calculations of the money flowing in and out of your business. Every business should have a formal accounting system that tracks revenue and expenses. This ensures that, at any given moment, you have accurate information on which to base important financial decisions.

Once you have a real accounting system in place, make it part of your routine to track and analyze your cash flow. Are sales moving up or down? Are expenses growing faster than sales? Is one service more profitable than another? How many sales are required to meet expenses each month? How soon are clients paying their invoices?

Monitoring income and expenses can keep you out of the red—and avoid penalties for late payments. Plus, the answers to the questions above can help you make smart business decisions based on real data.

2. Mismanaging Credit
There are two ways to mismanage credit in small business: granting credit without wise credit policies or using credit with no plan of how to pay the bill. Both have a huge impact on cash flow and are often closely related.

As an example, say you get an opportunity to submit a proposal on a large building that requires you to order a lot of equipment and supplies. Your janitorial supplier expects payment in 30 days, but you won't receive payment on the account for 60 days. That creates a cash flow crunch, from which it may take months to recover.

In the meantime, you'll likely pass on smaller jobs that would have provided quicker cash at less cost. And if you're not able to come up with the cash for your supplier, you've endangered that relationship as well.

3. Ignoring the relationship between Receivables and Payables
The money your customers owe you is called "accounts receivable." The money you owe vendors is called “accounts payable.” Are those two line-items in your budget “playing nice” with each other?

In a perfect world, your receivables would come in with plenty of time for you to remit to your payables. Of course, the business world isn't perfect and things often go awry. A customer doesn't pay when promised, so you can't cover your bills as expected.

That's why it's important to build your cash flow to the point of having more receivables than payables. What's more, you want “quality” payables, meaning balances in good standing (if your receivables are years old, you'll likely never see the cash). Also, don't count revenue before payments are collected.

4. Being passive
Speaking of accounts receivable, unpaid invoices from clients can quickly kill cash flow. Failing to proactively collect payments could put you in a dangerous financial situation.

Consider having a late-payment penalty in your contract, and don't turn a blind eye to customers who violate it. An example of a penalty is 2.5% after 10 days past due and work stoppage after 60 days. Having a solid collections policy is important, but it only works when you put it in action.

Set up a process for handling late payments. Create a timeline for sending reminders, making phone calls, stopping by in person, cutting off services, or enlisting the help of an outside collections agency.

5. Focusing on profit
You can't pay bills with profit. In fact, you can't make profits without making actual money. That's because profits are an accounting concept, not cash.

Winning a few contracts (ie, earning revenue), doesn't mean you're profitable. From that gross revenue, you must subtract your costs—including payroll, expenses and future costs like taxes. If there's money left after those calculations, then you have profit.

This difference affects a business owner's decision-making process. "If I take on this big job, it will earn me a huge profit, but if I take on five smaller jobs, I'll have cash to pay my bills." Yes, you want to be profitable but every decision has to be measured against the effect it will have on cash flow.

6. Forgetting Uncle Sam
It's all too easy to forget sales tax, payroll taxes, and estimated taxes—those sorts of bills sit out there, almost off the radar screen. They don't have to be paid right away, but when they come due you better have the money to pay them or you'll be in hot water with the Tax Man.

Late payments will rack up penalties and interest on top of what's already due. In this serious situation, you may need to rob Peter to pay Uncle Sam...and it can take months or even years to recover from the cash flow deficit.

7. Frivolous Spending
Small businesses often operate with tight cash flow for years. Unless you've built up a good-size cash reserve to see you through an unexpected rough patch, you're always in danger of coming up short.

Basing future sales expectations on objective facts will save you from overspending based on pipe dreams that may never come true. Once you've created a savings cushion, and have data to support ongoing positive cash flow, you can pay yourself a properly taxed bonus to buy the speed boat or fancy car of your dreams.

Notice the words “properly taxed.” While it might be tempting to try and pass off personal purchases off as tax-deductible business expenses, don't do it. The folks at the IRS are overworked, but they're not stupid. An audit that could reveal your transgressions and could result in an unexpected tax bill, plus penalties and interest.

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