Cash flow kills four in ten small businesses within the first five years. It is the single biggest reason that many SMEs fail and often impacts on much larger enterprises too. However, cash flow is also one of the best channels to success. So, why does it have such a significant impact and how can you make sure that it works well for you?
Why cash flow is such a stone cold killer
Successive studies have shown that large numbers of small businesses fail every year as a result of a lack of control over cash flow. Although revenue and profits are undoubtedly key statistics, it’s cash flow that enables growth, funds development and ensures that liabilities are met, avoiding insolvency. When cash stops flowing, those parts of the business it can no longer reach quickly die, whether that’s marketing, staff or new products or services. That’s why poor cash flow management is a fast track to business failure.
The causes of a lack of cash flow
There are many reasons why cash flow can become impeded. It’s crucial that whatever is causing the problems is dealt with swiftly to avoid becoming a cash flow casualty.
Unpaid invoices – clients and customers not settling bills on time can be crippling for a small business. Almost two thirds of small businesses in the UK experience late payments of 90 days or more. A single unpaid invoice over that length of time can make cash flow stutter in a new business, and multiple unsettled accounts will significantly reduce the availability of capital to spend.
A lack of accounts aptitude – there may be cash coming into the business but if it’s not being properly tracked and managed then it can cause serious issues. Small business owners looking to avoid the cash flow killer must be on top of accounts, records and revenue predictions, whether by working with an accountant or doing this in-house. Burying your head in the sand when it comes to where cash is ending up in the business is a sure fire way to create problems.
The cash itself – it may be that you have management skills but no cash to manage. Businesses that are unable to generate cash to power their development will quickly fail. From investing in staff, to developing products and services and increasing marketing, there are many ways to ensure that there is enough cash coming into the business to support its growth.