Why do businesses fail? Maintaining cash flow is the number one reason, showing up in 82 percent of business failures, according to this infographic from Insurancequotes.com.
The graphic pulls together information from sources such as the National Federation of Independent Businesses, the U.S. Small Business Administration, and many others.
These findings echo what we have seen for a long time:
The statistics show that 20 percent of small businesses fail in their first year, and after five years fully half are out of business. Only 30 percent make it past 10 years.
While cash flow is listed as the number one reason companies don’t make it, running out of cash is listed as a separate cause, accounting for 29 percent of failures.
Defined as companies that employ fewer than 100 employees, small businesses make up 99.7 percent of all businesses in the U.S. There are about 28.8 million of them, with new ones popping up all the time – and disappearing just as quickly.
The infographic contains several recommendations, such as testing a minimum viable product (MVP), collecting market data, and taking steps to recruit and build a strong team. While these are all good ideas, they don’t directly address that number one cause of business failure. What can you do to assure your business maintains adequate cash flow and doesn’t run out of money?
The good news:
It is possible to predict a cash crunch before it occurs so that you can take actions to keep it from becoming a crisis. This really requires that someone in the business perform the function of a chief financial officer.
Most small business owners don’t have a CFO. Instead they may assume that their staff bookkeeper, accountant or controller, or an outside CPA, will provide them with the financial information they need to make good decisions. However these positions are really geared toward gathering historical data for tax and compliance purposes, rather than the predictive analytics businesses must have to make smart decisions going forward.
If you are using QuickBooks™ or other accounting tools, you should be aware that most of these only focus on historical data rather than predicting future cash flow. As a business owner, you need to develop a cash flow forecast. This involves coming up with some basic numbers.
In my experience, many business owners freeze up when they are asked to do this. For some reason, they are really spooked by the idea of predicting financial numbers.
While the process may seem daunting, it starts like any process, with a few simple steps:
Write an estimate of the revenues you expect your company to bring in for a specific time period (at least six months, but a year would be better), along with the expenses you expect to incur to support that revenue.
Organize it into a weekly report that has cash receipts (based on when you think you will receive payments) at the top with the disbursements (when you plan to pay your expenses) below. Start with your current cash balance, add the receipts and subtract the expenses for each week to get your new “expected” cash balance. This becomes the beginning balance for the following week.
Compare your company’s actual performance to the forecast you developed.
Determine what actions you need to take to take to meet cash flow demands going forward.
As you continue to make comparisons, you can refine your estimates to incorporate much more detail. In time you can develop a very useful tool. The key, as with any long journey, is to commit to taking a few steps forward, and then maintain the determination to continue the process. If you do this, you can’t help but to improve the performance of your company.
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