The following is written by financial expert Philip Campbell and is an excerpt from his book, Never Run Out of Cash.
Cash is King
By Philip Campbell
One of the cold, hard realities of business is that if you ever run out of cash, your business is finished.
All your hard work goes right down the drain. Your dreams and desires for creating an exciting and profitable business come crashing down. As one of my favorite authors Brian Tracy says: “This is not for you!”
The statistics on small business failures are alarming. Michael Gerber, author of The E-Myth, says this:
Businesses start and fail in the United States at an increasingly staggering rate. Every year, over a million people in this country start a business of some sort. Statistics tell us that by the end of the first year at least 40 percent of them will be out of business.
Within five years, more than 80 percent of them will have failed.
And the rest of the bad news is, if you own a small business that has managed to survive for five years or more, don’t breathe a sigh of relief. Because more than 80 percent of the small businesses that survive the first five years will fail in the second five.”
Wow! Those statistics are incredible – and scary. Just think: For every business started, four of them will fail within five years. Only one of the five will be left standing.
Which category will you be in? And why does a business fail? There are a number of contributing factors; however, they can all be summed up like this:
They Ran Out of Cash
What I find fascinating about these statistics is what’s hidden beneath the data. Is running out of cash just one of those things a vast majority of businesses should expect?
Seth Godin and Paul Lim, authors of If You’re Clueless About Accounting and Finance and Want to Know More said this:
“At the very least, your company must ensure at all times it has enough cash in its accounts to meet short term obligations as they come due.
After all, business can make the most innovative products and reduce expense through the most innovative management techniques.
But if it doesn’t have enough money to pay its bills, all these efforts will be for naught.”
Is every business destined to struggle to generate enough cash to pay all the bills and pay you a generous return? How many of these businesses were profitable but made the mistake of thinking profits were the same as cash?
Here is how the cycle usually works.
Cash Starts to Get Tight
When cash runs low, you get pulled into decisions such as: Which vendor are we going to delay payment on? How will we make the payroll? Are there any expenses we can cut immediately? What are we going to tell the bank?
Worry Sets in
Not being able to pay your bills on time is a terrible feeling. You feel like a failure. Your mind runs wild. You start thinking of all the bad things that might happen if your business collapses. It is scary and uncomfortable.
You are unsure about how long the cash flow problem may last. You don’t have a clear sense of whether it’s about to get better or it’s about to get worse. You don’t have a clear view of the extent or duration of the problem.
It’s like riding along on the freeway in a driving rainstorm and you discover that your windshield wipers don’t work. You cannot see the cars in front of you or behind you, so you slow down to a crawl. You’re just hoping and praying the rain stops before you end up in a terrible accident.
Your focus has shifted
Now you are spending most of your time trying to put out the cash flow fire. You cannot focus on doing what you do best – taking care of customers and making money. You are now the chief firefighter.
It is more difficult now to be out working with customers. It’s harder to coach and train your people. Even when you do get out there, your mind is still occupied with thoughts about the cash flow fire raging back at the office. The time you spend with your customers and your people is far less productive.
Calls about invoices and payments that would normally go to your accounting department are now going to you. Vendors are calling, angry and frustrated, because they are not getting paid on time, if at all. They want answers – from you.
The vendors are also questioning whether you will make it or not. They have seen other companies go down the same path. They have seen the failure cycle before. They start asking you what’s going on in your business: “Are you going to make it? When can you pay me what you owe me?”
Your business fails
When the cycle above sets in, it is very difficult to reverse. As it progresses, it picks up speed, diverts you away from what you do best, and eventually you crash into the proverbial brick wall.
Your worst nightmare unfolds. The pain and suffering of failure becomes a day-to-day reality.
It doesn’t have to be that way. There is a solution. And it’s easier than you may think.
Your action plan
• Never run out of cash
• Resolve now that you will not be one of the 80 percent of businesses that fail in their first five years. Take control of your cash so you are free to focus your talents on growing your business and making more money.
• Recognize that cash is what keeps your business alive. Manage it with the care and attention it deserves. It is quite unforgiving if you don’t.
Follow Philip Campbell, where he will show how you can quickly know the cash position of your business, so you can avoid the cycle of a failing business.