Last week, I went over the 6th most popular reason why a business fails. Over the next 5 weeks, I will be going over the remaining 5 reasons why companies are not successful, according to the Small Business Administration of the United States. You will see that there are some common elements to each of the 6. Feel free to look at the original article here.
How about we stop running around the bush and just admit: many of us are in business to make money. Now, how much money we are looking to make from our business might be a much different question? For some, they want their business to allow them to live a happy life with all of their essential costs being covered. For others, owning a business might be the nest egg they are looking to develop to allow them to retire on a nice warm beach and sip some cool drinks. And of course, there is that person that wants to own a business because they want to be filthy rich and featured on the front cover of Inc, Forbes or Fortune magazine.
Money is the one thing that is a consistent between all businesses. All businesses need it to survive. Many businesses that fail don’t have enough of it.
The 5th most common reason why businesses fail, they don’t have the cash or a system to manage their cash. There are number of ways you can avoid becoming a part of this statistic.
Budget: I have a sneaky suspicion that a small number of companies that fail because of a lack of cash had a budget. Develop a budget to help determine your future activities and the cash you will require for them. It will also give you goals in regards to your revenue level and margins that you want to attain.
Cash Flow vs Net Income: Do you have a strong understanding of what is the difference between your firm’s cash flow and net income or profit? Net income or profit is an accounting term to state how your operations are going financially. It is not a real number. There are some non-cash transactions which can cloud your picture.
Your firm’s cash flow is the difference between your cash balance at the beginning and end of the same period. Make sure you understand how that cash flow was derived. Was it developed from operations, because you sold equipment, or you received an investment from a relative? Only one of these cash flow sources is sustainable into the future.
Bookkeeping: Keep your books as up to date as possible. Openly communicate with your bookkeeper and accountant in regards to the activities of your firm. Being on top of your bookkeeping will help you to identify warning signs before they become red flags. Also, compare your actual results against your budget. When you see a difference, known as a variance in accounting speak, research why it happens and the steps you need to take to correct it. It will only help you understand your business even better and allow you to make better budgets in the future.
How do you manage your cash for your company? Do you have a budget? A cash forecasting system? I would love to hear.
Have an awesome week.
Kevin MacDonald is a Business Consultant at L6S Business Consulting Inc (www.L6SBC.ca). L6S offers services in management consulting, Controller and CFO contracting, and lean management with either project work or teaching/mentoring of staff. Kevin has his CMA accounting designation along with a Black Belt in Lean Six Sigma.
Kevin is active in the community by volunteering for different groups and donates platelets at the Canadian Blood Services clinic on a bi-weekly basis.
For help with your business, contact Kevin at kevin@L6SBC.ca or 780-868-1867.
Photo Credit: Erica Zambowski Flickr Creative Common