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Why do many businesses fail? Cash flow issues {Part 1/2}

Posted by
May 15, 2015 05:42pm
Posted in: Small Business Advice

This is Part 1 of a two-part series on the importance of cash flow to a growing business. In this article, we’ll introduce the concept of cash flow and discuss why it matters.

There are many small businesses out there today that have almost all the ingredients in place for a healthy financial future. They have strong leadership that’s creative and innovative. They have a sales team that’s working to bring in new customers. They even have good marketers who are doing their job and putting the word out.

In many cases, though, they’re missing one thing: cash.

“If you can’t collect from clients on time, your business is likely to be in trouble.”

At the end of the day, the most important thing small businesses need to ensure growth is healthy cash flow. You can make all the deals in the world with countless clients, but if you aren’t able to collect payments from them and keep the money moving in and out of your business in a timely fashion, it will be difficult to move forward.

Cash flow fuels a growing business
Fred Elkins is the credit manager at ND Graphics. He’s been in the business of managing money for 47 years in total, and he’s been doing it for ND Graphics for 26 of them. In a recent interview, Elkins explained that simply getting “IOUs” from your business partners isn’t enough. If you want to continually keep your business moving, you need to collect real money from them in a timely fashion.

“Credit stops you from utilizing your cash flow,” Elkins explained. “It doesn’t give you an immediate output of cash. It’s cash that allows you to get your receivables in and make your payables.”

If you can’t collect from clients on time, your business is likely to be in trouble.

Businesses fail without cash
The common misconception is that, as long as you have a good product and can sell it, it will be smooth sailing for your business. That’s not necessarily true. In actuality, you need cash to survive.

“On my side of the equation, which is the credit and finance side of it, businesses fail out there because people don’t realize that your accounts receivable, 99 percent of the time is the single largest asset that you have at your company,” Elkins said. “They don’t give it the respect that it’s due.”

When companies go under, usually one of the main problems is that they don’t have the right strategy in place for collecting money on time.

“Probably greater than 80 percent of the time,” Elkins said. “People out there think that they can grow the business and grow the business and grow the business without a cash flow. That just doesn’t happen.”

A good adage to remember, in any line of work, is that “good sales promotes good credit, and good credit promotes good sales.” If you have clients who can give you their business and pay for it on time, you’ll surely be better off.

Dedicating personnel to money matters
So what can your company do to keep the money moving effectively and stay afloat? The most important thing is to have dedicated personnel focused specifically on collecting money. When businesses simply delegate this task to someone else on the staff, it inevitably gets neglected, at which point the business runs out of money.

“For every $500,000 in sales or every 100 accounts, you should have one dedicated accounts receivable person.”

Elkins sees this all the time in the graphics industry.

“The biggest thing that I see out there with the smaller sign companies is, you’ll have Sign Company A and it’s an accountant who bought a franchise, and he’s terrible at sales. Or at Company B, there’s someone who’s bought a franchise and is a phenomenal salesperson, but terrible at accounting or finance,” he said. “They can fail on both ends. They can fail on the credit or finance side, or they can fail on the sales side.”

The best rule of thumb is that for every $500,000 in sales or every 100 accounts, you should have one dedicated accounts receivable person in charge of collecting all that money. This rule is tough to follow, though.

“Most companies don’t,” Elkins said. “Even some of the major ones out there don’t.”

That won’t work. The key to business success is to have personnel dedicated specifically to every responsibility that matters. Managing cash flow is absolutely one of them.


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