Small Business Failure - Reason: Cash-Flow

The first post in this mini series is related to this issue of cash-flow and so will be many that follow. Cash-flow is the central and most critical management objective for every small business and start-up business, like SOHO-, SME, SMB-, Micro-, Lifestyle-, Home-, DIY-, Hobby-, Boomer-, Professional-, Personal business.

T o perform this small business health-check, ask your self the following questions:

• Do I have a written plan and cash-flow forecast for my business? As I said before, without it it is like driving with your eyes shut.
• Am I efficient in achieving those aims? We often allow non-core issues and irrelevant stuff to “steal” our time, or we are so overwhelmed by work that we do not have the time to stand back and look at our small business - take the time and make those decisions.
• Do you have a feel how my small business works financially? If not, you must be feeling uncomfortable most of the time, again take the time and feel better about your small business.
• When did I plan and monitor my cash-flow last? You need to do this at least once a week or if something happens that is not in the plan. Check your cash-flow each time before you make a bigger purchase or hire staff which is not in the plan, you will quiet easily see if you can afford to do it or not.
• How much reserves does my business have? The best peace of mind is when your small business has substantial reserves, do you have any or are you at least planning to get a 2-3 month reserve buffer?
• Have I re-negociated my terms with my suppliers? What if your suppliers gave you 60 or even 90 days payment terms - put that in your cash-flow and smile, it’s instant reserve. You need to pay your suppliers on time, only then will they trust you enough to give you the extra long payment terms.
• Am I chasing my clients for payment adequately? Do you know the average number of days you clients need to pay you? Give incentives - 2 % off if you pay within 7 days - try and keep your average well below 30 days. If you have not enough time to do credit control outsource it.
• Do I need my overdraft? If you get better payment terms fro your suppliers and do a better job at credit control, you may not need your overdraft anymore, which will save you a lot of money. Don’t cancel your overdraft, but make sure you only pay for it when and if you use it - shop around. On those terms you should get an overdraft, even if you do not need it, so if something unexpected happens you got the cash-flow reserve.

The importance of your cash-flow situation can not be overestimated, as long as you can pay your bills you are in business - as the saying goes: Cash Is King!

You can see other reasons for small business and personal business, like contractors, freelancer, self-employed, sole-trader and virtual assistants failures in my Health Check Category, if you can add to this list please do so, I would welcome your comments.

5 Responses to “Small Business Failure - Reason: Cash-Flow”

1. Kamarulzaman Baharom
   http://www.bestcashmanagement.com
   
   Said on September 16th, 2007 at 5:20 pm

   I agree with you Mr Stefan, in fact cash flow is very important for our business so that our business will never run out of cash. I have done daily cash flow for the past 10 years and found it very useful and the most important thing is, knowing exactly our cash position will give us peace of mind.

2. kelly
   http://www.vintagelifestyle.co.uk
   
   Said on April 1st, 2008 at 10:31 pm

   Hi, can cash flow forecasts work for small businesses that sell one of each item for example, vintage and antique goods? I have tried to work out a cash flow but each month is so different to the next, depending on what items we find at auctions etc and each month the sales amounts are so different from the next. I know cash flow is very important ( we are always having problems with it) but I can not find a way to make it work for us. Any ideas?

3. kelly
   http://www.vintagelifestyle.co.uk
   
   Said on April 6th, 2008 at 6:15 pm

   Anyone?

4. Stefan Töpfer
   http://www.winweb.com
   
   Said on April 6th, 2008 at 11:50 pm

   Hi Kelly,

   Cash-flow forecasting works for all businesses. Even if you have only income once a year.

   Your problem seems to revolve around not generating enough steady income, I would not worry about that. Just estimate what it will be over say a year and then plan the rest accordingly.

   The idea of cash-flow planning is not to get it right spot on, that rarely happens in any company, the importance is with the understanding what is happening n the business.

   Sorry for the delay in coming back to you, let me know if you have any more questions about this.

   Stefan

   Stefan.

5. kelly
   
   Said on April 8th, 2008 at 12:10 am

   Hi Stephan, thank you so much for replying. I can imagine you are a busy person! Is the importance of cahs flow forecasting just so that at the end of the year, I can see where we have had bad months/good months? I have started using a simple software program that allows me to see more clearly what is going on with our business/finances etc. I hope that this will help although I can see the program is not exactly right for our needs.

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