… and cash flow is a common culprit
All business owners have heard envious comments like “Oh, I’d love to have my own business!” or “It must be great being your own boss!”
What few of these entrepreneurial admirers appreciate is the fact that business ownership requires intense effort and a fierce commitment to solving a problem in the marketplace, and a significant amount of resilience. Even with all of these factors, success isn’t guaranteed.
20% of new businesses with employees fail within their first year
By the second year, that number increases to about 34% and about half of all new businesses fail by year three. Why? Cash Flow.
Poor cash flow means failure could be on the horizon.
While numerous factors can contribute to business failure, poor cash flow spells death for any enterprise. Even if your company has fantastic new customers or product lines coming on board, you may be in peril if those opportunities take too long to generate revenue or the expense of servicing them eats up your reserves.
In fact, 29% percent of a sample of start-ups studied by the research firm CB Insights failed because they ran out of cash. This was the second-deadliest factor in the study, ranked behind “no market need” and just ahead of “not the right team.” A U.S. Bank study ranks cash flow as even more critical, positing that “82 percent of business failures are due to poor cash management.”
Would you get in your car and plan to drive a long distance without checking if you have enough gas to get you there?
Plowing ahead without knowing your resources can be equally devastating to your small businesses. Understanding current and projected cash flow is an essential management tool that impacts every aspect of the business.
Here are some key steps for keeping sufficient cash on hand to stay afloat:
- Keep the books organized. Falling behind on payments or collections, failing to reconcile invoices, or being sloppy with tracking money can create a cash flow crisis. You need to know who owes you, who you owe, and when it’s all due. Without that solid foundation, you won’t be able to forecast cash flow.
- Rosy projections are your enemy. Just as counting on unreliable customers will throw off your actual cash flow, so will unrealistic projections of short-term growth, impending sales, or lucrative upsells. Be pragmatic and conservative when planning for the future and it’s less likely you’ll be caught short.
- No rainy day fund. Conservative planning doesn’t only apply to business projections. Every company should strive to maintain a cash reserve for unforeseen crises or simple downturns in business. We recommend keeping at least enough cash in a bank account to cover two to three months of operating expenses.
- Growing for the sake of growth. Rapid growth will inevitably eat up cash reserves as the natural investment in additional resources and the delays in obtaining payment accrues. The most successful businesses properly plan for growth and discriminate while growing, only choosing new customers, product lines, or services that make sense and quickly add to the bottom line. It may seem counterintuitive, but it’s possible for rapid expansion to actually kill a business … if it kills all of their cash.
Don’t simply keep the books – plan for the future
There are many more steps to keeping track of cash flow, from matching up the credit terms between your customers and your suppliers and avoiding unnecessary capital expenditures, to accurately accounting for overhead … but nearly all of these issues stem from a failure to sit down, analyze the books, and use the numbers to make accurate projections.
Having a clear picture of your company’s cash flow gives you the ability to guarantee stability, pivot on short notice, seize new opportunities, and optimize growth and profitability. Getting this picture requires dedication and persistence … or hiring experts who can do it for you.
Profit Point Consulting’s mission is to accelerate the growth of small and medium-sized companies through sound, strategic advice, and proactive financial management. If you need a trusted advisor to help develop and execute your vision, connect with us today.