How important is cash flow to your small business? Very important, as poor cash flow is one of the main reasons that small businesses fail.
The word “cash flow” is perhaps one of the most revered and feared words in the vocabulary of most small businesses. Naturally, therefore, your position towards the term is likely determined by how your business is doing at the time.
If your business has a significant cash flow, the word will likely be music to your ears. However, if you struggle to keep the cash flowing, it is most likely a word that causes you great pain.
Few business terms elicit such a chilly response. And, unfortunately, those two tiny words (both of which are four-letter terms, by the way) are the number one reason small businesses fail. They are responsible for more small business closures than any other reason.
In reality, cash flow is the leading cause of failure in 82 percent of small firms that fail.
While most small business owners believe that cash flow is the most critical risk, cash flow is also a catch-all term — a symptom, if you will – for various underlying issues.
You can see how to solve the cash flow symptom if you look at the underlying causes.
Create a budget that is as low as possible.
In other words, keep it affordable.
As your company grows and expands, there will be a constant balance between funding and supporting that expansion and being frugal with your spending. When in doubt, go for the safe option. try to take a “lean and mean” approach to your business of trying to do more with less and establishing the concept of a minimal viable budget for funding projects.
When things get complicated, as we have seen the past 16 months, you will need a tight operating budget to carry you through the tough times. As a word of caution, don’t expect your company to be the shining exception that never has a problem.
Keeping it affordable applies to budgeting: staying cautious with your money even when things are going well. When times are good, conserve cash and be frugal. Because if you can’t save in good times, it’s unlikely you’ll be able to save when business gets difficult.
Take steps to safeguard your credit.
Hopefully, you have never witnessed a company starting to fail. Often, the first sign of trouble is when they begin to pay their bills late. Alternatively, they may change their payment terms from 30- to 90-day net. Unfortunately, almost everyone close to a failing company knows what is happening.
After delaying payments, the next step is prioritizing payments, or “who can we not pay for as long as possible.” This is dangerous because the company will likely make a mistake, and its credit will suffer as a result. Additionally, a single vendor may become so frustrated that they decide to contact a collection agency or terminate service.
It’s usually too late once that happens.
It is often much easier to borrow money when you don’t need it. Your lending possibilities diminish considerably whenever you show indicators of financial distress. Even if you can obtain a loan, the terms will be significantly less appealing.
Treat your inventory as though it were your most valuable and expensive business asset.
You want to do this because it is, in fact, your most valuable and expensive asset.
Inadequate inventory leads to a variety of costly issues that can wreak havoc on cash flow. They are as follows:
- Ordering new products you don’t need because you couldn’t find them before.
- Expired products that should have been liquidated (even at a bargain) before they lost their value.
- You may have foreseen unfulfilled orders based on inventory demands.
- The extra costs incurred as a result of trying to fill those backorders.
- Customers who have to wait for backorders to be filled are often dissatisfied.
- Time wasted searching for missing inventory, placing rush orders, and managing backorders.
- The high cost of paying for more inventory space than you need — assuming your inventory is adequately controlled.
The list could go on and on, but I think you get the picture. Poor inventory management is a costly issue that is startlingly widespread. Small enterprises do not maintain inventory or employ a manual procedure in 43% of cases. Furthermore, 55% of small businesses do not track or utilize a manual process to manage their assets.
Maintain a cash reserve.
Could you sustain a financial downturn if your business stalled for three months? How about a six-month commitment? Is it a year? A recent study found that 1 in 5 small businesses surveyed came very close to close their doors permanently.
It’s not an enjoyable conversation to have, but if you don’t already know the answer, you should chat to your accountant about how well prepared you are for a prolonged time of weak economic conditions. Of course, you never know; the news might turn out to be better than you anticipated. But, on the other hand, maybe you’re in an excellent position to go through a hard patch.
But even if you aren’t, consider yourself fortunate. You still have time to prepare. It might be worth slowing down your company’s growth, even if it’s just a bit, to ensure you have enough financial reserves to deal with anything if business conditions change.
Again, this isn’t a fun conversation to have, and it might mean you need to tighten your belt a little. But it’s a lot easier to talk about your cash flow needs with your accountant than to fire your employees.
Hire an outstanding accountant (or CPA).
Cash flow issues rarely appear out of nowhere. Instead, they frequently build up over time, in many forms, while the business owner is preoccupied with running their business.
That is why having a good accountant or CPA may be pretty beneficial. You have a terrific insurance policy against cash flow problems if you have a competent, proactive financial consultant who is looking at your company’s finances with rigor and insight (and many other financial woes).
Unfortunately, that same proactive quality that makes an excellent accountant is also the number one quality that business owners believe their accountant lacks. Regardless of the size of their company, over half of all small business owners think their accountant is “more reactive than proactive.”
On the plus side, many small businesses have a proactive financial partner and do not face poor cash flow management. Follow in the footsteps of such successful entrepreneurs. It has the potential to save your company.
How important is cash flow to your small business?
As we have seen, it is very important.
It is almost as though cash flow issues are as inevitable as death and taxes. You can never really escape them. However, with good habits and advisors, you can effectively manage your cash flow. And you can undoubtedly tame it to the point that it doesn’t pose a threat to your company.
If you need an equipment loan, working capital financing, or something else, we can help. As entrepreneurs ourselves, we know what it is like to run and grow a business. Give us a call at (800) 795-3019 or contact us to discuss your business financing needs today.