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Cashflow: Is Success Killing Your Business?
The single biggest reason that small business operators go out of business is due to a lack of cash. Like a person dying, grasping for that last breathe, perfectly good small businesses die daily for lack of cash. The operators may know what they are doing in terms of the service or products they sell. They may, in fact, have the very best widget or provide the most extraordinary service, but they will be out of business in short order if the cash they need to operate their business and pay them selves is not available. The lack of cash in a small business may be due to many factors, the most obvious being a lack of sales, followed by operational costs and profit goals, usually ending with the growing aging of receivables. Especially for many successful small businesses, the receivables become a glaring problem. The success these businesses enjoy: higher and higher sales, often means more and more receivables, and unless they stay on top of collections or have prepared in advance for additional cash infusions, their success can literally kill their business. More sales means more payables and depending on the type of business more operational costs or at the very least more costs for inventory in retail and wholesaling operations, as more and more cash is taken up in the receivables collection stream. Service businesses employing more people as sales go up are especially hard hit by sudden increases in success as they need more cash to keep up with rising payrolls while their non-cash sales continue to tie up their cash, literally starving them of cash in the midst of success. In small business, like most things in life, some advance planning can help relieve the stress associated with success. If your business is beginning to grow rapidly or if the cash you need to operate your business seems to be unavailable although your sales are increasing then the problem may be with your receivables. Many small business operators don't like the "bookkeeping" aspects of their businesses so they neglect them. Monitoring the receivables and collecting money is not top of the list of activities for most small business operators who are more comfortable selling or providing the service that made their business successful in the first place, so these critical business functions get overlooked and the cash they need begins to get lost in the continuing, growing and aging receivables. A simple way to anticipate and evaluate your future cash position is through the use of a Cash Flow Calculator. While you can hire an accountant or bookkeeper to perform this function, most small business operators don't need to go to the trouble or cost of doing that. Do a Google search and most likely you can find a simple tool that can help you understand where your cash is, what your cash trends are, and where you're likely future cash position will be given the assumptions you supply the model. While not complicated, this sophisticated tool can really help small business operators gain an understanding of the effects of success and receivables on their business. Better still is the fact that by changing the assumptions you can track what would happen if you decided to change they way you do business. Who knows maybe you shouldn't take on another account right now because you don't have the cash to pay for your new customer? Or what about one of your bigger accounts who keeps ordering more and more but paying less and less on his account, what would be the effect of deciding to insist he pay at least 25% on his outstanding balance? All of these sorts of questions can be easily answered through the quick analysis of a Cash Flow Calculator. While no substitute for competent accounting help, it can be used by seasoned operators or new start-ups to gain an understanding of the effects of success on the cash cycle in a business. Success in business can be a wonderful thing but without planning many small business operators go out of business due to lack of cash. The most important thing to do is to understand your cash situation and takes steps to make sure that the success that you're enjoying in your business is literally paying off in cash to you.
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