There are many reasons why the majority of small businesses fail within their first few years of operation, but by far the most common cause of small-to-medium enterprise (SME) failure is poor cash flow management. Unfortunately, many times business directors and owners overlook ways to reduce expenditure, ultimately leading to the downfall of a company that could have been made viable with just a few key adjustments.
Before we go any further we should specify that the term ‘cash flow' refers to the amount of money that flows in and out of the business, so it is therefore not a description of how much profit a company is making, but rather how its funds are being transferred and allocated on an ongoing basis. If your company is running at a loss then optimising cash flow is probably not the only issue you should be concerned with.
Some notable practices that may help improve cash flow and boost available working capital include revising or eliminating burdensome supplier/employee contracts, applying for secured financing, liquidating non-essential assets, investing in marketing and advertising campaigns, and cancelling costly subscriptions and services.
If you're not convinced that proper management of cash flow is the single-most important aspect of protecting your business from a premature downfall, consider the following 4 reasons:
1. Lets You Capitalize on Profitable and/or Limited Investment Opportunities
When it comes to facilitating business progression there are few things that are more important than soliciting/retaining clients, and being able to charge as much as possible for your offerings while still providing a satisfactory value. However, accomplishing this isn't easy when you don't have the funds needed to invest in components that can improve your outreach and customer satisfaction efforts.
With excess capital available you'll be able to purchase inventory, equipment, or services that could potentially increase profit margins and improve your ability to compete with other companies in your industry. This concept holds true whether you're a retailer, supplier, manufacturer, broker, or service provider.
2. Helps You Avoid Unnecessary Credit Damage
Companies that operate within strict budgetary confines are continually in danger of falling behind on repayments and other financial obligations. Unfortunately, just a few late payments or a single default can cause significant damage to your credit score, which in turn could hurt your chances of obtaining approval for much-needed financing in the future. If you've recently been in the habit of making non-essential investments, keep in mind that those funds could've been put towards debt repayments, and that it may be wise to sell some nonessential assets in order to meet your financial obligations.
Although investing in the future of the business may seem to be more important than repaying existing debts, operating in this fashion is actually counterproductive, as failure to repay your debts will inevitably lead to financial woes that will be detrimental to the progression of the business for years to come.
3. Takes The Stress Out of Covering Operating Costs
If there is one adage that holds true in nearly every business endeavor it is that “it takes money to make money.” With accurate budgeting and accounting processes in place you'll be able to reliably predict how much cash needs to be set aside for crucial operating costs. Adversely, without proper management of cash flow even the simple task of paying bills on time can become a confusing challenge that is a source of recurring stress month after month.
A great way to reduce the hassle associated with covering operating expenses is to ensure that your payment due dates are scheduled appropriately. Creating an accurate cash flow projection can help you determine the most ideal dates on which to fulfill your key operating expenses.
4. Puts You In the Position to Fund Unexpected Mishaps, Budget Lapses, and Legal Expenses
A company's resilience can be effectively measured by its ability to adequately prepare for the unexpected. If you conduct a high volume of business or are entered into several repayment agreements then there is always the chance that an expense can go overlooked. Furthermore, with proper cash flow management practices in place you'll be able to set aside a ‘legal expense reserve' that can be utilised in the event that a client or business partner decides to sue your company at sudden notice.
Author Bio: Kieth Tully is an corporate debt management specialist with Real Business Rescue, a company rescue firm that is part of the UK's largest and most progressive insolvency group. In this piece, RBR shares 4 reasons why maintaining adequate cash flow is perhaps the most important aspect of managing and growing a small business.