Why businesses fail and how to avoid it – Part 7
In the interests of trying to assist both start up and established businesses to avoid the many pitfalls that businesses can face, we created this series on why businesses fail and how to avoid it – and this is already part 7.
In previous articles we touched on a myriad of reasons for the failure of businesses, including some of the obvious ones like having no business plan, no capital to sustain the business through bad times, poor financial management – and many more.
There have also been many lessor reasons that businesses can fail, but in this article we examine one of the major reasons for the demise of a business and that is poor cash flow management. Cash flow is a major problem facing most businesses, but don’t confuse cash flow with profit.
Positive and negative cash flow
It is possible for you to go bankrupt with record cash flowing into your business, because you don’t just need cash flow, you need positive cash flow! This only happens when the cash flowing into your business is more than the amount of cash leaving your business.
Businesses that ignore this end up with negative cash flow which is what happens when the outflow of cash is more than what’s coming in – and this should always be avoided! Improving cash flow takes just a few precautions, but they are actions that are often ignored or not tried by businesses, to their detriment.
Ways to improve your cash flow
Start right – At the outset, have enough capital in the bank to cover your business expenses and cash flow problems for at least six months. If you are already established and didn’t do this, then try to secure loans for emergencies
Get paid in advance – This is the best way to avoid poor cash flow, as it usually happens through late payments. At least ask for deposits, or preferably full payment, in advance.
Early payment incentives – If you can’t get paid in advance then consider offering discounts or other incentives for early payment.
Avoid offering credit – Unless you are in a business that is forced to do it to survive, don’t offer credit to customers, or at least be very selective when doing so.
Manage your debtors’ age analysis – Ensure that your clients know what your payment terms are. Follow up immediately and regularly with clients who exceed your payment terms.
Seek help from the professionals
Professional Accounting services like Ratio Accounting are experts at advising on and helping businesses to better manage their cash flow and many other aspects of good solid financial management.
We hope that this article has been helpful. If so contact us for advice on all areas of ensuring that your business doesn’t fail and is, at least from a financial management point of view, a resounding success!