“What separates thriving businesses from those that struggle?” asks Forbes. Could it be an awesome business plan? What about a no-fail product idea? Or maybe it has to do with being in the right place at the right time?
According to a CFED (Corporation for Enterprise Development), the answer may not be what you’d think. Their findings suggest that the key to small business success may be directly related to the owners’ discipline in managing their personal finances and business cash flow (which are often times intertwined).
What the CFED discovered about cash-flow management among small business owners was shocking:
- 55% of online survey respondents said they could only cover a single month’s business expenses with their savings. 30% had no business savings at all. Just 17% of the online survey respondents had three months’ of business savings.
- Of the more established owners who responded to the phone survey, only 49% said they had two months’ business savings or less.
- Asked how they would handle an emergency business expense of $1,000, 41% of the online survey respondents said they’d have to tap personal savings, and 31% would have to borrow on a personal credit card. 15% said they could not cover such an expense at all.
- 47% of small business owners (of establishments 1 to 3 years old) said they had a damaged or insufficient credit history that affected their ability to borrow. For businesses over 10 years old, this problem affected 19%.
- Problems managing cash flow plagued businesses of all ages and sizes. 40% of online survey respondents lack the cash to meet business expenses. 37% of the more seasoned business owners have the same problem. 42% of that group said their cash crunch resulted from a gap between the delivery of products and services and payments, while another 35% cited low sales.
While these statistics were collected in 2014, they are still relevant today. Why? Because no matter how good you are at generating foot traffic, providing awesome customer experiences, increasing in-store revenue, or driving sales through social media marketing, bad cash flow management is going to catch up with you. “Even if you run a multi-million dollar business, poor cash flow can destroy it,” says Forbes.
Cash is the Lifeblood of Any Small Business
“Despite the fact that cash is the lifeblood of a business — the fuel that keeps the engine running — most business owners don’t truly have a handle on their cash flow,” says Philip Campbell, a CPA and former chief financial officer in several companies and author of Never Run Out of Cash (Grow & Succeed Publishing 2004). “Poor cash-flow management is causing more business failures today than ever before.”
Cash flow is one of the key components of small business success. “Without cash, profits are meaningless,” says Inc. “Many a profitable business on paper has ended up in bankruptcy because the amount of cash coming in doesn’t compare with the amount of cash going out.”
Effectively managing cash flow can make the difference between success and failure. Having cash on hand ensures that your suppliers, employees, and others, will be paid on time. Good cash flow also enables you to invest cash back into your business. If you don’t exercise good cash flow management, you may not be able to make the investments necessary to compete and grow.
When you effective manage your cash flow, you’ll be able to meet your everyday business needs and avoid the accumulation of debt. Being debt free gives you more freedom over business operations and activities. Having debtors, on the other hand, may mean they’ll have a say in how you run your business. If your debtor’s opinions differ from yours, it could interfere with your vision for the company.
To put it simply, attempting to run a business without managing cash flow is like trying to paddle a canoe without an oar. You must monitor and control cash flow if you want to navigate your business to success. Needless to say, the best direction to paddle a boat is with the current. Similarly, your business will be much healthier if you’re not trying to go against the grain, so to speak, with your cash flow.
Improving Cash Management
Just as a canoe may not reach the desired shore without the help of a paddle, achieving a positive cash flow isn’t going to happen by chance. You’re going to have to work at it.
Here are 4 ways you can start steering your cash flow management in the right direction today:
Navigating Shortfalls – For all your good intentions and best-laid plans, there will be times when your small business will experience shortfalls. “When that happens,” says The Hartford, “the key is to act quickly and decisively so that you can turn around the situation and avoid any potential financial calamity.”
According to many best-practice tips, if you want to be proactive, effective and efficient in your cash flow management, you need to resolve problems as soon as you become aware of them to avoid further complications and potential costs. For example, if you predict a shortfall in your very near future, you might contact your landlord and ask for a payment extension, run a special promotion to drive additional sales, or spend an extra day trying to collect overdue payments from customers.
Try to conserve cash whenever possible. View potential purchases with a critical eye. Do you really need it or can it wait? If the purchase is necessary to your business operations, make installment payments to ease the burden of a large upfront cost.
Also, consider stashing away some cash for a rainy day. The survival of your business may depend on your ability to maneuver shortfalls. If you’ve got some cash you can fall back on, you’ll experience less stress during the lean months.
Collecting Receivables – When you have a lot of money owed to you by customers and clients, it can be difficult to pay your bills. For a healthier cash flow, try to collect receivables as soon as possible. Staying on top of receivables will ensure that you have cash on hand to carry on routine operations and meet your financial obligations.
“In order to shorten your receivables period,” says Inc, “you’ll need to have a good collection system in place.” Ask yourself the following questions:
- How long is it taking to get paid?
- What is your collections activity?
- Are you getting the right level of contact with your customers?
- Are you identifying disputes fast enough?
- When you identify disputes, what is your policy for getting them resolved?
Creating a plan to address and resolve these questions will not only help you get paid faster, it will improve your customer service.
Keep in mind, too, that staying on top of tardy payers isn’t just about looking at the 90-days outstanding column on your account receivables report, but also the 60-days and 30-days column. This is especially true in a bad economy where you can’t afford to sit back and wait up to 90 days to receive payment.
Extending Payables – While you’ll want to collect your receivables as soon as possible, by contrast, you’ll want to extend your payables to net-60 or net-90, if you can. If any of your suppliers charge late fees, though, you’ll want to make sure you pay them on time.
When you pay electronically, you can wait until the day a bill is due to make payment. This will buy you time while improving your cash flow. Or, you might use a business credit card, some of which offer grace periods up to 21 days. You might even get cash back. Just be cautious about piling on too much debt.
Do you maintain friendly, regular communication with suppliers? If so, it’s likely you can land better term deals with them. You might even consider paying suppliers early if they offer you a discount in return.
Improving Inventory – Goods that aren’t moving can tie up a lot of cash. Evaluate your inventory and get rid of goods that are poor sellers, even if you need to sell the products at a discount.
Always monitor your inventory. When you keep your eye on daily sales activity, you’ll glean valuable information that can help you predict future sales more accurately and handle inventory more efficiently.
Consider investing in an all-in-one, cloud-based POS system featuring a single database that manages inventory between the website and point of sale in a seamless, integrated process. In addition to streamlining the inventory process, you’ll always have an accurate view of your inventory numbers. Since data is presented in real time, you’ll be able to order the right amount of goods, while avoiding losses resulting from overages and shrinkage.
Regardless of how profitable you are, how good your business plan is, or how many investors you have, your business is not going to survive if you can’t manage your cash flow. That’s the word from a study that discovered that an alarming 82% of businesses fail due to poor cash flow management skills.
“There is an old maxim that no business ever collapsed because of lack of profitability but many have gone under because they lacked cash…Managing your cash resources and making sure you have enough to meet your needs, such as paying wages, buying supplies and meeting your personal financial requirements, is absolutely critical.”
Source: The Telegraph
Focusing on profitability isn’t going to secure the future of your small business. Learning how to effectively manage your cash flow, on the other hand, will have a dramatic impact on your business’s long-term success.