5 Common Cash Flow Pitfalls That Can Threaten Your Business and How to Prevent Them

Cash flow is the lifeblood of any business. According to recent research, nearly 80% of Australian small to medium businesses have experienced cash flow challenges in the last 12 months, with inadequate cash flow being the leading cause of business failure in Australia. Even profitable businesses can fail if they run out of cash. Let's explore five critical cash flow mistakes and how to avoid them.

Mistake #1: Not Managing Payment Terms and Failing to Chase Invoices

Research from Xero reveals that 53% of invoices are paid late in Australia, with businesses constantly owed an average of $38,000 each—totalling $76 billion in outstanding invoices nationwide.

The Problem: Many business owners delay invoicing or offer overly generous payment terms to win clients. Others avoid chasing late payments fearing damaged relationships. This creates dangerous cash flow gaps where you're covering expenses before being paid.

The Solution:

• Invoice immediately upon completion of work or delivery

• Use accounting software (Xero, MYOB, QuickBooks) to automate reminders

• Set clear payment terms upfront (Net 30, Net 14, or Net 7)

• Follow up consistently—reminders at day 7 and day 14 prevent late payments

• Consider early payment discounts (2% for payment within 10 days)

• Don't hesitate to charge late fees when appropriate

Mistake #2: Failing to Separate GST and Not Planning for BAS Payments

The 10% GST you collect on sales doesn't belong to you—it belongs to the ATO. Treating it

as revenue creates a crisis when your Business Activity Statement (BAS) is due.

The Problem: When money hits your account, it's tempting to spend it all on operations. Then quarterly BAS arrives—potentially tens of thousands of dollars you no longer have. For quarterly reporting, BAS is due: 28 October (Sep quarter), 28 February (Dec quarter), 28 April (Mar quarter), and 28 July (Jun quarter).

The Solution:

• Open a separate BAS savings account immediately

• Transfer GST (10% of sales) to this account every time you receive payment

• If turnover is under $10 million, choose cash basis GST reporting (aligns better with cash flow)

• Set aside PAYG withholding and superannuation using the same discipline

• Work with a registered BAS agent to secure additional lodgement time

The ATO offers payment plans if needed, but prevention is always better than cure.

Mistake #3: Operating Without a Cash Reserve Buffer

Every business faces unexpected expenses—equipment breakdowns, supplier price increases, or economic downturns. Without a cash reserve, these events quickly spiral into crises. Recent data shows low cash reserves affect 30% of Australian businesses experiencing cash flow challenges.

The Problem: During growth phases, it's tempting to reinvest every dollar back into the business. However, this leaves you vulnerable to the smallest financial shock.

The Solution:

• Aim for three to six months of operating expenses in reserve

• Start small—even $5,000 is better than nothing—then build gradually

• Set up automatic transfers (5-10% of revenue) to a separate savings account

• Define what constitutes an emergency (broken essential equipment: yes; new marketing opportunity: no)

• Keep reserves separate from operating funds to reduce temptation

Seasonal businesses need larger reserves. A café might need six months to survive the post-Christmas slump, while tax preparers need buffers for non-tax season.

Mistake #4: Confusing Profit with Cash Flow

Your profit and loss statement might show profit, but your bank account tells a different story. This misunderstanding has led countless profitable businesses to insolvency.

The Problem: Your P&L shows income when earned and expenses when incurred—not when cash changes hands. A Melbourne building company might record $100,000 revenue and $70,000 costs (showing $30,000 profit), but if customers haven't paid yet (60-day terms) while suppliers need immediate payment (30-day terms), there's a $70,000 cash flow gap despite being profitable on paper.

The Solution:

• Monitor your cash flow statement weekly, not just monthly

• Create a 13-week rolling cash flow forecast—update it weekly

• Understand your cash conversion cycle (time between paying suppliers and collecting from customers)

• Manage working capital: collect receivables faster, optimize inventory, negotiate supplier terms

• Compare P&L with cash flow statements to understand timing differences

Growth requires cash for inventory, staff, and operations—even when profitable. This is why many businesses struggle more during growth.

Mistake #5: Ignoring Seasonal Fluctuations and Growth-Related Cash Flow Gaps

Research shows 27% of Australian businesses cite seasonal fluctuations as a major cash flow factor. Industries particularly affected include hospitality (post-holiday slump), construction (weather delays), and retail (post-Christmas).

The Problem: Budgeting based on average monthly revenue ignores reality. A restaurant might average $50,000 monthly, but actually earn $80,000 in December and $30,000 in February. Without planning, lean months become crises.

Growth creates similar gaps. Increased demand requires cash for inventory, staff, and operations before you receive payment from new sales.

The Solution:

• Analyze 2-3 years of historical data to identify seasonal patterns

• Build a 12-month forecast reflecting seasonal reality (not averages)

• Save during boom times to cover lean periods

• Adjust cost structure—use casual staff during peaks rather than permanent year-round employees

• Before accepting large orders, calculate upfront cash needs versus payment timing

• Consider invoice financing or business lines of credit for growth opportunities

For seasonal businesses: earn in four months what you need for twelve. A Queensland swim school might generate 70% of revenue October-March but needs cash year-round.

Taking Control of Your Cash Flow

Cash flow management is an ongoing discipline that separates successful businesses from failed ones. These five mistakes are preventable with proper systems, planning, and professional support.

If you're experiencing cash flow challenges, don't wait until it becomes a crisis. The earlier you address issues, the more options you have. Whether implementing better invoicing systems, creating forecasts, or managing BAS obligations, small changes today prevent major problems tomorrow.

At LK Accounting & Advisory, we help Australian businesses build robust cash flow management systems that provide clarity, control, and confidence. From bookkeeping structures to cash flow forecasts and BAS management, we ensure your business has the financial foundation to thrive.

Need help getting your cash flow under control? Contact LK Accounting & Advisory today for a free consultation.

LK Accounting & Advisory provides professional bookkeeping, accounting, and business advisory services to businesses across Australia, specializing in helping small to medium businesses establish strong financial foundations.