The majority of small business failures are actually a result of cash flow and not profit problems. There are many examples of small business that sold so much so fast that they could not pay their bills. Primarily because they were not paid quickly enough from their customers but now have to pay more bills to their suppliers to cover their newly increased sales.
To you, this may sound obvious. On the other hand, you might be like many others who are surprised that one of the biggest dangers in business is ‘growing faster than the business can afford’.
To me the only surprise is how many business owners do not plan for their cash flow throughout the year. Often they don’t have a basic cash flow forecast, let alone the ability to model potential changes in their businesses.
For example, can you model the effect on your cash flow of:
A change in your turnover (even a slight one)
An increase or decrease in your prices
Changes in inventory levels and work in progress
Taking on or letting people go
Changes in your receivables or your payables
Reducing your overheads
Increasing your borrowings
Do you just carry out changes and assume or hope that it will be beneficial?
Do you just try and increase your sales and hope that this will be good for business?
Whilst an increase in sales is normally good for business, it’s often the cause a myriad of other problems which impact cash flow.
It is always better to model the changes before you carry them out to see what the impact will be on your business and, indeed, your life.
Conclusion: The good news is that, in order to dramatically improve the profits and cash flow in a business, it often only requires a few tweaks and not a major overhaul.
Thanks for taking the time to read this article.
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