Cash is different from profit. Many ‘profitable’ businesses have gone under – although on the surface they may be trading well and there is a good margin ‘on paper’ for their products or services, a lack of cash to pay their short-term bills will usually end badly.
In fact, 82% of small businesses fail due to cash flow problems (Source: Business Insider)
Here are three warning signs to look out for that you could be heading for a cash crisis, and what you can do about it.
Three Warning Signs
Here are 3 indicators that you may be heading for a cash crisis
No cash flow projections or cash budget.
While many businesses plan for revenues and profits, all-too-few do an adequate of job assuring sufficient cash flow. EVERY business should have a comprehensive cash flow budget – a cash flow statement completes the income statement and balance sheet as the three essential financial management tools for a business.
Rapidly growing businesses are much more likely than slower growth businesses to run out of cash. Cash flow needs increase with growth rates. That’s because the business needs to hire new people, increase marketing, invest in production capacity, order more inventory, and make other expenditures to keep up with demand. The smart business owner will slow growth if required in order to balance capacity, cash flow, and demand.
Early stage development.
Early stage companies also are more likely to run out of cash. They often receive only partial funding for investors who will provide more cash pending certain milestones. At the same time, most entrepreneurs underestimate the time to cash flow and cash flow required in the business by as much as 100-200% (time and time again!).
What to do about it?
Budget your cash flow and have continuous conversations
Discuss the status of current cash flow, projected needs, any unanticipated cash outlays required, ways to generate additional cash, and ongoing targets. Get a good accountant!
Protect your credit (1)
Secure sources of cash well before the cash is needed. Cash comes much less expensively and freely when the business owner doesn’t need it. Once the business owner needs cash, he or she either will often have to pay a premium.
Protect your credit (2)
Don’t bankroll your customers. Proactively manage your customers to ensure they pay on time. It can feel difficult to get serious/formal with ‘the hand that feeds you’. But if they’re not paying you on time then they’re not really feeding you…are they?
Put controls in place to avoid unnecessary uses of cash. For instance, have a clear agreement that expenditures over a certain limit must be discussed by the Board or entire leadership team. The business is more likely to conserve cash if strict controls are in place to avoid missing the cash flow plan. This includes treating your inventory like it was cash.
A business coach can hold the leadership team accountable for managing cash and provide a much-needed objective look at when exceptions to the cash flow budget are appropriate or not.
The bottom line: If you intend to stay in business, do not run out of cash or sources of financing.
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