Most small businesses fail because of a failure to manage their money. If a business doesn’t have positive cash flow, can it still operate?
No, it can’t. Most businesses fail in finances because the individual or individuals behind the company do not have healthy money habits. None of us were taught to manage our money in the traditional school system.
According to the Small Business Administration (SBA) Office of Advocacy’s 2018 Frequently Asked Questions, 80% of small businesses survive the first year while only half of the small businesses survive past the five-year mark.
But the closure of your business has a detrimental effect on the economy, we don’t want it and you don’t want it. The first thing to take care of is the person behind the business, you. We specialize in helping you master your personal finances and grow your business. It’s not your fault, we all weren’t taught the right things about money but we don’t have to let those old paradigms exist.
Most businesses fail but yours doesn’t have to.
We are in the age of the independent business owner. More businesses and jobs will be created in the 21st century than throughout all of human history.
Even so more will fail because of a few things which all businesses can avoid.
If you don’t identify a problem, and each day it gets 1% worse, what is the outcome?
After a year, it’s 365% worse, after two it’s double, and so on. Just as our daily habits add up, the problems add up as well. These are the most common things we run into when a business fails.
How many hats are you wearing?
As humans we have an incredible ability to focus but when we divide our attention, our output suffers. You will wear more than one hat while operating a business. It’s up to you to decide what you can outsource.
Just ask yourself the question, how many hats are you wearing?
While it may seem easy to multitask, it’s proven that the more we focus on, the less concentrated we are.
Wearing multiple hats takes you away from your own mission, getting customers. More customers supports your top line, and allows you to scale. But you can’t focus on customers if you’re fixing bank statements, contacting the IRS, hiring, mentoring, and marketing. Something’s got to give and most of the time your customer suffers.
Concentration and Memory affect multitasking the most.
When it comes to concentration, think of it like driving a car. You might think it’s okay to check your phone, it’s not. What if you’re eating something? What if you were babysitting? Driving a car is enough of a responsibility as it is, the more you add onto you , the more stress is caused and it affects your ability to drive the car.
Your memory isn’t bad, it’s untrained. When we were kids we remembered phone numbers, addresses, emails, all by heart. Everything existed in our heads until the cell phone was invented. The more we relied on technology, the less we remembered. Can you recite five phone numbers?
Outsourcing gives you what everyone is working for, time. If you find your business heading on a downward slope, it might be time to ask for help.
Build Profitable Cash Flow
There is a vast difference between positive cash flow and profitable cash flow. A business can have a positive cash flow and not be profitable. Just as a business can be profitable without a positive cash flow.
Profitable is when income exceeds all expenses.
The goal is to become profitable with positive cash flow.
Cash flow tracks your account payables and receivables. It allows you to look at your numbers as they stand today. These are steps you can take to remain profitable while maintaining positive cash flow.
Your budget should be as lean as possible. I mean the bare bones here. We shouldn’t be spending on luxurious items. We should be reviewing our budget, looking for expenses that we can remove or reduce. A budget will help us get into the next step.
Build a Cushion
A lean budget’s purpose is to help you build up cash flow. Building a cushion now helps your business on rainy days. If you’re unsure of how much to save, you should start with operating expenses. Can you cover operating expenses for the next month? What about the next two months?
Again, building a cushion when your cash flow positive helps.
Building a cushion when
your cash flow positive helps.
If you would like more cash flow tips, check out our article on Unbelievable cash flow tips that can change the game for you.
Gather feedback, more importantly negative feedback
I read this little gem in 10x by Grant Cardone. Ask your customers but also ask people that didn’t become customers. Ask them why they didn’t become a customer and what you could have done differently. What you’re doing wrong is much more valuable than what you’re doing right. So if you’re gathering feedback, gather negative feedback.
You and your business are separate entities
One of the reasons you incorporate is to separate your personal assets from your business. It protects you, and thinking of you and your business as separate entities will continue to protect you. Take a step back and analyze the whole picture. Only when we remove ourselves does the picture become clear. Separating yourself can open you up to different ideas of what could be impacting your business.
If your business manages inventory, treat it like the life of your business, because it is.
Inventory is an asset, so in essence, it is your cash flow.
You don’t own 1,000 units, you own $100,000 worth of merchandise, each unit is worth $100. Always attach a dollar figure to your inventory. If 200 units break, you lost $20,000. If you can apply for insurance do it. The cost of not having insurance is much more than the cost of insurance. Insurance is one of the things you should know to legally protect your business. I wrote about insurance here.
Poor inventory management causes an expense. What was meant to bring you income is now costing you money.
You can look at this in more than one aspect to understand why I call it the life of your business.
If incorrectly forecasting your supply for the demand, you lose customers. The customer will likely go somewhere else where they can get the same thing.
When you lose inventory or inventory is not tracked properly. It is a loss.
If your employees spend time looking for inventory, then wages go up.
Inventory is best managed with a system, like accounting inventory should make sense. If it doesn’t you’re missing variables.
Understand what type of insurance your business has, insurance is one of the things that can legally protect your business. The cost of not having insurance is greater than the cost of keeping it.
The message, the market, and the offer
The message, market, and offer is the holy trinity for your business. If you master these three, your business will not fail.
What is your message? Your message is not only how you communicate with your customers but what you’re saying to them. Most often a businesses message doesn’t reach anyone for one reason. The message is about your business not about what the business can give their customers. You need to convey your message in a way that grabs your markets attention.
Who is your market? Most of all, who is your audience? Who is it your selling or serving? If you can’t identify this person in a crowd, your business will fail. Knowing your audience is extremely important in a world that has too much information. Being general gives no value to anyone in today’s world and often is a turnoff for future customers.
What is your offer? Your offer is created from the market, your offer solves a problem for an audience and it creates your message. Each of these are connected but what you offer is the most important piece. Your offering needs to serve the current needs and emotions of customers while giving them an experience. Customers care more today about the experience than ever before. How they feel when they choose you should match your message. By matching these, you’ll grow fans, not customers.
Be Honest With What You Know
When was the last time you took your business to the doctor?
Is it every quarter? Once a year?
We go to the doctor because they’re a professional who
understands how to treat symptoms. Accountants are your professionals.
Running a business is similar to taking care of your health. Don’t neglect it because there’s no time, identify any symptoms you have and treat the disease.
You have to think about the business itself, also the person behind it, you.
Think of yourself as the heart of the business. Without a heart, your business won’t live. It’s a vital organ, and you’re that organ.
For the business to remain healthy, you need to self-audit. What do we know and what don’t we know? Self-auditing gives you starting point of where the business can improve.
Most of us don’t take care of ourselves as it is. If you’re responsible for someone else, it’s likely you don’t make time to get to yourself. Your business will be as efficient as you are, it’s as simple as that.
When we allow smaller symptoms to continue, it adds up.
If I eat a bag of Cheetos today, nothing will probably happen.
However, if I eat a bag of Cheetos, every day for the next year, I may not like the outcome.
You might think, “I’m fine, I don’t need to worry about a self-audit.”
In the United States, you can operate your business as long as you comply with the guidelines set forth by the government. Failure to comply with guidelines can result in a closure of the business.
Just like your health, if you don’t protect it, you will lose it.
Daily Habits to help keep your business afloat
We discussed habits in Getting out of Debt.
Now we’re going to focus on the habits that can keep your business thriving.
All of us have unhealthy and healthy habits.
Our life becomes the sum of our habits, and in that case each of us has the ability to change these. These daily habits can help you feel like you have more of a handle on your business.
Check your business account daily for fraudulent activity and to understand what you’re spending.You might be spending thousands of dollars a month on something that isn’t helping your business, we’ve seen it. The sooner you can catch any fraudulent activity the better. You’re the first line of defense for your business but you don’t have to be the last.
Your accountant should also have a system in place to identify and categorize your expenses.
Conduct daily deposits of any cash collected. Cash that is sitting around waiting to leave your business. Usually excess cash is spent by us and you want to avoid theft if possible.
Review emails during a certain timeframe, otherwise you’ll dive in and out of your emails all day without actually making progress.
“Most people overestimate what they can do in one year and underestimate what they can do in ten years.” – Bill Gates
Take time each morning to plan out your business for the day. By focusing on fewer things, you accomplish more because you’re using your attention. Rome wasn’t built in a day but they were laying bricks every hour. Your patience will pay off.
Patience, in my opinion, is the most important habit you can build. The building of patience requires you to recognize and endure impatience. The two are a duality because by controlling your impatience, you learn to be patient.
Building a business is a lifetime adventure, where the adventure goes, is up to you. If you do the work and you have the patience, you will reach your destination.
Summary for avoiding closure
Most businesses fail because they don’t manage their business metrics. Everything can come at a cost but not everything is costly. The more you can manage your personal income, the easier it will be to handle your businesses income.
Business ethics aren’t commonly taught but can be easily learned, having a mentor helps you along the way.
A business has so many different dynamic variables that if you don’t have a handle on them, you will need help. It’s better to build a stronger foundation in the beginning, then to start off on the wrong foot. What type of investment are you willing to make?
Having a plan helps but if you don’t identify the cause of your business problems, they will persist. If you can’t identify the problem or they aren’t seemingly there, having an outside opinion helps you take a step back from something, we know you hold so close.
The first step to fixing something is admitting it’s a problem. If you’re not the one with the solution, then the next step is to seek help.