In every growth stage of any business, no matter if it’s early start up phase or in full maturity, continual cash flow challenges suck the energy and efforts from poorly run as well as well-run companies. These challenges make companies compromise on good decisions about growth and even sometimes stretch the truth and fool themselves on the real and urgent issues around cash flow.
In a statistic that may surprise you, 65% of businesses that fail are profitable. You might we wondering how this could be, if a business is profitable then how on earth could it fail? It’s because of the way cash moves through the business and it’s this valuable knowledge that causes business owners and managers to really get their act together and pay close attention to cash flow in the business. In most cases, the time it takes for this to happen in somewhere in the 5 to 7 years range of the businesses life cycle and it’s vulnerable if not watched closely from that period onward.
If a business owner or manager manages to survive the initial 5 to 7 year period, if they have paid close attention, they have learned several lessons. Unfortunately, many are too disconnected from the financial side of their businesses; they rely on a financial manager, accountant or CPA to keep them aware of possible issues. But, the fact is, the most staggering cause of failure of most managers is a lack of understanding financial metrics, causes and effects of the financial points of their responsibilities.
Many don’t spend adequate time on learning or understanding:
Accurate financial projections Sales reports AR and AP metrics Cash Flow Reports Budgets and Actuals Balance Sheets P & L Statements
A lack of understanding about any or all of these critical measures and metrics can spawn roots in poor cash management. You may have heard “cash is king” and it’s true, but many times the king doesn’t get any attention until there’s no king around when it’s needed. I wrote and said back in 1993 at my then organization that any manager in our organization that doesn’t understand or can explain fluently these things will not be around long and any manager-in-training who doesn’t will not be moving up in any circumstance. That’s how important I believed it was 25 years ago and it’s even more important in today’s fast business environment. I do not disagree that you need someone to help on the finance side; you better know what’s happening in finance as well.
65% of businesses that fail are profitable.
At the owner, CEO or VP level, never abdicate complete financial authority to anyone, regardless of the size of your organization. The financial stability of the company is your responsibility, and you must have education and literacy around it for yourself.
Competency Check-up: You need to be able to do these 3 things to start.
Do cash analysis of your business
Be able to forecast your cash needs
Be able to review where your cash is spent and where it goes on a regular basis
Don’t be overwhelmed by various theories and tools. Cash analysis is only valuable to you if it helps you understand and manage your cash. Find 2 or 3 financial indicators regarding your cash that helps you manage your business. Get to know those indicators very well and monitor them consistently. Keep educating yourself, but don’t stray from your commitment to those cash management indicators. You’ll feel more confident about it, you’ll be more knowledgeable by watching them and hopefully, you’ll sleep better at night.
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