The best piece of business advice you’ll ever get is this: “Cash flow is king.
Seasoned business owners understand the power of an abundant cash flow situation. All companies, regardless of profitability, will experience a slowdown in cash at some point.
82% of business failures are due to poor cash flow, so it’s a serious metric you should be monitoring. Companies that can forecast a cash crunch and have procedures in place to survive the storm will be in the 18%.
In our experience, here are the top reasons businesses struggle with cash flow beyond a dip in the economy:
Overspending during your early days
If you overspent during your early days, you might be feeling the pain now. The money you spent on unnecessary consultants and fancy offices would better fund your day-to-day operations.
Sure, it takes money to make money, but spending money without a clear purpose is wasteful. Everything you buy should be a part of your carefully laid plan, so you have absolute control. Just because you’ve been in business for years doesn’t mean you can operate without a plan.
Failing to collect receivables
Many businesses collapse not because they can’t sell, but because they never collect what they do sell (keep a close eye on clients in these industries). When you’re forging ahead and struggling for growth, don’t forget to organize your accounts, or you won’t have cash on hand for other purposes. Every dollar sitting in receivables is a dollar you can’t use to keep your business afloat and drive growth.
Develop an internal procedure that generates payment reminders with penalties. Many companies have success by offering their clients a slight discount for paying quickly. Often just having a clear payment policy encourages your clients to pay promptly.
Not keeping an emergency cash cushion
An unexpected expense that you can’t afford can be disastrous to most businesses. Just like your personal finances, your business should maintain a stash of cash for emergencies. A three-month safety net (that includes payroll) is essential. This will protect you when something unpredictable happens.
Failing to track your cash
Ultimately, this is most likely the problem at hand. A business doesn’t have a comprehensive picture of where/when its cash is coming from and where/when it’s going.
Use a cash flow statement (here’s a great template) to predict future cash shortages so you can plan ahead. Monitor it regularly, update it with monthly actuals and use it to guide your operations.
Being too optimistic about future sales
Naturally, we all want our businesses to succeed, but growth isn’t always linear. Every business has a slow month or a sales slump occasionally.
If you understand your target market and your sales capabilities, you should be able to create a confident sales forecast. Make sure this prediction is reasonable and obtainable. Use real numbers and historical evidence. Don’t expect constant, rapid growth.
Employing strong cash management practices and keeping yourself aware of your company’s financial profile is key to growing a sustainable business. Even if your business is profitable, you’ll never be successful if you can’t manage your cash.
Vice President, Commercial Lending