SBEs are touted as the growth and job creation engine for the world’s economies. Although championed as the desired model; SBEs barely exceed a 50% survival rate after 5 years of operation.
The reasons behind their failures are complex and varied. However, evidence points to a lack of financial management and adequate cash controls as one of the primary reasons.
This article focuses on one of the key pillars of strong financial management: Cash Flow Management. Simply put, cash flow analysis examines the timing of the intake of revenues against the outflow of expenses.
Business owners must avoid the following 4 traps:
- Lack of Insight into Financial Performance:
Many owners delegate the task of financial management. However, understanding financial reports such as cash flow budgets are important to providing early detection of potential cash problems requiring corrective actions. Variance analyses should be conducted on all line items with +/- 10% deviation. Entrepreneurs should establish a balanced financial scorecard for their business, including cash flow measurements as a key metric of measuring their businesses health.
- Poorly Managed Accounts Receivables:
“Cash is king” is a familiar refrain. Incentives like Early Payment Discounts should be part of the payment terms offered to customers—especially customers who comprise a significant percentage of AR.
- Heavy Investment in Non-Cash Bearing Resources:
SBEs often allocate disproportionate amounts of money to expense items such as salaries, furniture, space, marketing collateral and operating expenses tying up large amounts of cash better used to cover operating expenses.
- Maintaining Large Cash Balances:
Small firms can often become too risk averse and maintain large amounts of cash which could be invested to earn a rate of return which could be used to weather changing business conditions.
Entrepreneurs experience these problems when they don’t maintain a focus on their income, receivables and payables. Many are left wondering how they went out of business even though customers and revenue were growing.
When faced with cash flow challenges, business owners need to immediately take proactive measures to shore up their cash position. 1. Identify and cut fixed cost expenses, 2. Renegotiate payment terms with major suppliers, and 3. Seek help from banking institutions and/or other sources of funds (A/R Factoring, business partners, customers, “angel” investors, family, friends, etc.).
Establishing a successful business is not a spectator’s business and inaction is the surest way to complete failure.