What cash flow mistakes should small business owners avoid when the economy slows down?

Entrepreneurs of all stripes take a risk with their savings to chase their dream. They’re gambling their time and their savings on the hope that they will come out ahead. But they can lower the odds of failing, and raise the odds of succeeding, by handling their cash flow well.

Cash Discipline

A slowing economy is when cash discipline matters most. You have less cash flow coming in, and yet you still have the normal overhead to cover. Owners who aren’t diligent about that in good times will surely struggle in a downturn.

According to Bureau of Labor Statistics data, about 21.7% of businesses fail in their first year. The SCORE Foundation, which helps small business owners, says the number-one cause for this is poor cash flow management.

Borrowing is a common mistake, the oldest cash-flow trap for businesses. Hamlet’s famous line “Neither a borrower nor a lender be” does get old, but business owners who go into debt today do so at their own peril. Debt hurts in any market, but in an uncertain 2023 it can be a ticking cash-flow bomb.

A stay-at-home mom who turns her candle-making into a business faces similar danger. Putting wax, wicks and packaging on a credit card at higher rates means every purchase eats into profit, and every lull means the bill comes due even as sales slow. Better to start small with a handful of products, grow organically and seek financing only after there’s traction and revenue.

Taxes are another trap. Whether you wash windows on Main Street or high above Wall Street, you may have earned money and not set aside payroll taxes, and now you have to cough up more than you may have expected to pay.

Neither the Internal Revenue Service nor your state tax authorities are likely to offer leniency in terms of how they collect. Failing to pay the tax you owe can bring fines on top of what you owe. Fines can be a big blow to your cash flow. Don’t let this hurt you at tax time.

Look at all the moving parts in your business. Are you accounting for them all? The owner of an online boutique supply company discovers on a Saturday afternoon there’s a negative balance in the bank account because invoices were never sent out.

Digging further, the owner finds a handful of purchase orders that never went out, and a pair of vendors who haven’t been paid. There’s a month’s worth of billing to do, and vendors to reschedule. A bookkeeper, or good inventory software, might keep that from happening again.

Growth needs the same care. Take a young Oregon winery that had a terrific 2021. An online critic called its chardonnay the best in the state.

The winery planted more vines, yet 2023 found customers less willing to buy high-priced wine. They finally sold off extra cases at a loss just to move the stock. Should someone have run forecasts past a CPA or banker before planting more vines?

Insist on Collecting for Every Service You Provide

It can be painful to chase down a client. The worst case: You do the work, and then you never get paid. A plumber pours sweat into fitting bathrooms in a new home, then the general contractor doesn’t pay up.

Subcontractors usually end up carrying the collection burden. You may not have time to keep after clients, and you can’t afford to let them slide for a long time. Unpaid services pile up fast. Persistence is vital to keeping your business alive. Be delicate, but insist on collecting for every service you provide.

You need to be choosy about new clients. You take a risky chance when you accept any customer who shows up. Slow payers, partial payers and no-payers have always been a problem, and slowdowns usually bring a higher percentage of trouble clients. Taking time to look into potential clients beforehand on LinkedIn or through a Google business profile can help minimize such problems.

Invoice with Terms

Unpaid invoices also underscore the importance of clearly stating your terms when you start doing business. Being diligent to set and state payment terms ahead of time can help keep cash flowing.

Here’s a mistake that’s so easy to fix, and yet it happens too often. Owners never negotiate payment terms with their customers, and when it’s time to bill, they never put the terms on their invoices.

An invoice doesn’t qualify as a legal contract. What it does reflect is what you and your client or customer agreed upon. When your work is done, you’ve kept up your part of the bargain. You are due payment for that work. Having agreed-upon terms on your invoices, and upfront in your dealings, makes it easier to collect.

Cash flow is the lifeblood of any business. Because entrepreneurs usually have less access to capital and savings than large corporations, one cash hiccup can end a dream.

2023 isn’t shaping up to be an easy year. Yet that doesn’t mean there isn’t plenty of hope. Plan for all of your expenses, vet your customers, invoice with terms, and keep collecting after the work is done. Diligent business owners can still have an excellent year.