Why is staying on top of cash flow so difficult?
Ironically, studies show the most common reason businesses fail isn’t due to poor management or a bad idea—it’s cash flow.
I relate this problem to running. There’s a technique for distance running where you’re practically leaning over, using gravity, to help you run. If you stop using your legs at any point in time, you’re are going to hit the ground. You use gravity to move forward and maintain a good pace.
It’s the same principle with small businesses. As a small business owner, you probably always feel like you’re on the verge of falling over. There’s a fine line between feeling that way and actually falling over due to failing to maintain cash flow.
Our recommendation? Forecast.
Take a look at your expenses. If you’re selling a product, you’ll need to look at how long it takes to deliver that product to the client, when you receive payment, etc. because there’s going to be a lag between when you deliver and when you’re paid. Take up all the costs of the sale and delivery of the product before you take the revenue. If you’re selling a service, then you’re going to have salaries and wages to pay for, plus any of the products needed to complete the service, the marketing involved…it might take some time before you have the revenue come in.
So, we teach small businesses to focus on forecasting in order to stay on top of cash flow. Consider how long it takes, on average, to collect revenues from sales in comparison to what the associated costs are. Your cash flow will be in a much better place when you take the time outline your finances in this way.