Cash flows, as its name suggests, refers to movement of actual money received and spent. It showcases the pattern of income and expenses, and its consequences for how much money is available at a given time. Despite its description being straightforward and easy to understand, the same cannot be said when it comes to its management. It can be tricky and at times pretty hefty. Luckily, spot factoring is a life saver in such cases.
So what mistakes do most entrepreneurs make against cash flows that can seriously threaten the company’s liquidity? Here take a look.
Mistake: Long Outstanding Receivables
Accounts receivables are not bad per se but if they become long outstanding then they cease to be quite the promising asset they were supposed to be. Long outstanding accounts mean that they have gone past their maturity. They remained uncollected and therefore useless and illiquid. Overtime they can even be written off as losses.
Mistake: Overestimating Sales Volume
There is nothing wrong about optimism in business but everything has to be set on a realistic scale. Your sales won’t triple in a month by some miracle. If you overestimate and make use of unrealistic and proof-less basis then you are in for a bloody treat. You might even spend more thinking that you are going to earn more which can be fatal.
Mistake: Poor and Lenient Credit Terms
Regardless if you are the vendor or the buyer, it is important that you take a good look at the terms and conditions you set out or are set before you. As a vendor, make sure that you are not lenient when it comes to credit policies offered to your customers. As a buyer, understand all terms first before signing into the contract.
Mistake: Mismanaged Records and Transactions
To better gauge and assess one’s cash flows, proper records and management is necessary. There has to be a system set in place to raise red flags when disadvantageous circumstances arise. Accuracy and timeliness are also crucial here. If records are erroneous or are not recorded and made available in time then all efforts will remain futile.
So how does spot factoring fit in all these? Of the mistakes listed above, long outstanding receivables or simply a high bulk of trade receivables threaten liquidity as it traps cash within invoices for significant periods of time thereby preventing the business from using its resources. With spot factoring, companies can advance their value prior to their maturity thus hastening acquisitions and providing a quick financing option without having to settle with debts.