There are few experiences scarier than watching your business checking account balance dwindle toward zero. Cash flow problems can be fatal for businesses of all sizes, but small businesses are most susceptible. According to a study by CBInsights, 29% of businesses fail because they run out of cash. With more than a quarter of businesses failing due to cash flow problems, it is important to understand the warning signs and create a strategy to manage cash flow.
Here are seven ways cash flow can hold your business back.
1. No room for expansion.
One key to success in business is the ability to grow and scale. By growing your business, you can lower your cost per unit sold and dramatically increase both revenue and profits. However, if your business does not have the cash to grow, you may end up stuck with a meager business existence.
Amazon, Walmart, Toyota, Royal Dutch Shell and Samsung Electronics are some of the biggest companies in the world in terms of revenue, but they didn’t get to this size by not spending any money. It takes investment to grow. However, without the cash to invest, growth can be an elusive pipe dream.
Cash flow can also be a major factor in getting approved for business financing. While not all kinds of business financing (there are more than 40) require cash flow history as part of the approval process, many do and having inconsistency in that department can lead to a denial. And cash flow isn’t the only thing that matters when you want a loan to grow your business: your business credit score, business plan, years in business, and collateral can all factor in, depending on the type of loan you need. (You can check your business credit score for free on Nav.)
2. An inventory crunch.
Have you ever walked into a store with the intent of buying an item just to find it out of stock? Did you wait for the business to reorder or just go find it somewhere else? In the age of Amazon, finding it somewhere else can happen faster than the customer leaves the store. In today’s ultra-competitive environment fueled by the web and other emerging consumer technologies, inventory problems are enough to kill an otherwise successful business model.
Product-based businesses need something to sell, or they will see an immediate impact to the top line. Don’t let your business fail for something as simple as running out of product to sell. Inventory shortages are a big red flash for cash flow issues.
3. Stress covering payroll.
If you can’t pay your employees, closure is imminent. An inability to make payroll is one of the worst situations a business can find itself in. Failure to follow through on payroll obligations can be a crime in some jurisdictions, and shows your employees that it is time to find a job elsewhere.
Employee retention is key in growing a successful business, and a lack of cash to find and cultivate the best talent is a death sentence. Losing good employees from cash flow reasons is a fast track to business failure.
4. Missed payments.
Just like a strong grade point average helps get into the best college, a strong credit score helps get the best loans and the best interest rates. If you may need to borrow for your business to succeed, strong cash flow and on-time payments will boost your credit score. But cash flow struggles regularly lead to late payments, which will lower credit scores, and can lead to loan rejection when you really need it.
Your business credit score is an important tool. You can tap into your business credit to access new business credit cards and loans that could help you avoid short-term cash flow issues. Of course, loans cannot fix fundamental problems with the business, but they can help get through a rough patch or solve a seasonal cash crunch.
5. Cutbacks on marketing.
Sales and marketing are the lifeblood of any business. Any successful business leader can tell you just how important sales are. Think about it like this: if you have the best product or service in the history of the world and no one buys it, your business will fail. If you have a terrible product or service and sell zillions of units, your business will most likely succeed.
This example isn’t a suggestion to create a terrible product or service, it is evidence of how important sales and marketing are to a business. If you have to cut the marketing budget for a few weeks, no big deal. But if you have to cut for a long period of time, you may end up starving your business of new customers and new sales. That is a business death sentence.
6. No efficiency upgrades.
If your business can make five widgets per hour at a cost of $5 each and you are happy with that level of productivity and profitability, imagine what would happen if you could buy a new machine that allows you to create 10 widgets per hour at a cost of $4 each. You could hypothetically double your sales and increase profits by about 20% with that new machine. But if the machine costs more than your cash flow can support, you are stuck with fewer sales and lower profits.
Successful businesses know how to invest in productivity improvements. Unsuccessful businesses know how to invest in productivity improvements but can’t afford it. What kind of business do you want to run?
7. Out of business.
The worst-case scenario is completely running out of cash and an ability to stay in business. When cash flow gets so bad you can’t pay the bills, restock inventory pay employees, and cover general operating expenses, there are few alternatives outside of closing the doors for good.
Part of the excitement of entrepreneurship is the risk of failure. While many businesses don’t make it to the five-year mark, that is rarely the plan. Most founders plan to be in business for many years and earn healthy profits. If your business is starved for cash, that is an unlikely ending to your company’s story.
Get access to credit before you need it
By the time you realize you need access to credit to restock or pay the bills during a rough patch, it may be too late. Rather than wait for your business to teeter on the brink of failure, take proactive steps to ensure your business remains solvent.
Cash flow is a key performance indicator for every business. Stay on top of cash flow and keep a backup plan in place for a rainy day. If you do, your business will stay in a healthier, more stable condition that can help avoid the bad cash flow blues, and might even keep your entrepreneurial dream in business.