4 classic cash flow mistakes social enterprises make
Time for a sobering thought.
There’s one single thing that will kill your social enterprise stone cold dead: poor cashflow.
Take your eye off the ball for just a moment, and this vital element of your social enterprise may spiral our of control and cause problems from which you simply cannot recover.
Clearly, you don’t want that to happen. Neither do we. And that’s why we’ve decided to let you in on four classic cash flow mistakes that social enterprises make:
1. Over-investing during the startup phase
You’ll need to invest in your social enterprise to make it a success, but too much impulse spending during its startup phase, and you’ll quickly run out of funds.
Before you commit to any purchase during those early days, ask yourself if there’s a lower cost (or free) alternative. Do you really need a new laptop? Is that lovely new office a step too far at this stage?
It’ll require some tricky decisions to be made, and while it certainly takes money to make money, you should only invest in the stuff your enterprise absolutely needs when it’s getting off the ground.
2. Being overly optimistic about future sales
It’s good to be optimistic as a social enterprise – it’s what sets the successful business owners apart from the rest – but too much optimism when it comes to sales forecasting can present serious cash flow issues further down the line.
Always be objective and realistic when forecasting sales. If you have historical information to go on, use it as a guide, but don’t assume the same thing will happen this time around.
Revenue forecasting is very tricky when you’re first starting out, but it’s for that reason you should tread carefully. Use your intuition and set sales forecasts that are both achievable and which won’t tempt you to over invest to achieve sales numbers that simply aren’t going to materialise.
3. Forgetting to keep a cash cushion
Even the best cash flow forecasts in the world can fail if something unexpected happens within your social enterprise or its sector.
This is why having a cash cushion handy is so important. If you’re constantly operating from an account with a zero balance, you have no safety net for when things get tight (and they will – trust us).
Try and maintain an account balance of at least two months’ worth of operating expenses – that should enable you to take stock and account for any unexpected dips in sales without plunging into the red and having your bank manager suddenly breathing down your neck.
4. Being too kind when it comes to debtors
Going the extra mile for your customers is to be applauded, but if you do so when it comes to overdue accounts, your cash flow will inevitably take a significant hit.
It’s tricky as a social enterprise or small business to have solid collections policies in place, and chasing late payers is a task that forever slips down the to-do list.
However, keep on top of your debtors you must, because bad payers will become serial bad payers if you give them the opportunity.
Set in place a 30 day payment term with some form of late payment penalty (this is usually a percentage charge that rises the longer the debt stands). Make the policy clear with customers from the outset, and you should avoid cash flow issues related to slow payments.
You’ll probably find cash flow management one of the toughest tasks as a social entrepreneur, but it’s one that simply can’t be ignored.
Avoid the common pitfalls above, and you should find that your enterprise operates from a healthy cash base, enabling it to achieve it’s goals and grow as you’d planned.