Scary figures aren’t they? And the reason behind almost every failure is something financial. Basically whatever the underlying cause, they ran out of cash and didn’t see it coming in time to fix it.
My quest is to help companies stay in business long term by helping them understand at least the basics of managing their finances, because it’s the key skill that will make that difference between surviving and not.
Far too often I still come across business owners who run their business just based on what’s in the bank, thinking that’s ok.
But it’s not, and this is why:
1) Cash and profit are completely different things, and hardly connected at all in most business models.
2) Cash is just the final stage of all your transactions going through your business; there’s a time lag between the actions that caused each transaction and the cash changing hands.
3) Cash doesn’t give you the heads up on what’s going to happen next week, month or quarter.
4) It doesn’t tell you anything about the profitability of your business (unless you’re haemorrhaging cash in which case you’re probably losing money)
5) Cash doesn’t tell you what your customers owe you, or if you can afford to pay your suppliers.
6) Cash doesn’t know how much you’ve got tied up in stock.
7) Cash doesn’t know if you’ve got a big VAT bill next week and the corporation tax due next month.
8) Cash doesn’t know if one of your customers isn’t going to pay you.
9) Cash doesn’t know if sales are going to drop next month.
10) Cash is basically looking backwards, whereas you need to be looking forward as far as you possibly can.
11) You can’t survive long term without profit, unless you have very deep pockets. The profit you make drives the cash into the business, and losses will drain your cash.
12) If you manage by what’s in the bank, by the time the balance starts going down and you start to worry, the problem that caused it has been there for many months and it may just be too late to do anything about it.
So next time you find yourself thinking that cash is the be-all and and-all, remember its not.
But it could be the one thing that ends it all for your business if you’re not paying attention.
Make sure the information you use to run your business is looking ahead as well as behind. That’s what’s going to make the difference and keep your cash flowing in the right direction.