There are many reasons a company will go out of business. The obvious reason is the company not having enough sales. It could also be due to not making enough profit, the company is not staffed properly or the company leadership not understanding how to operate the business. The business is not being fully given the attention it needs or requires. Or it could be the company’s product or service is now outdated and not as sought after by customers. For example, with the invention of the car the horse and buggy mode of transportation became obsolete. Those big car phones businesspeople had installed in their cars disappeared once smartphones were introduced. Every business has a cycle. But even highly successful people that beat the odds every day can one day, if not paying attention, go out of business. One reason is: Cash flow problems.
Why do CEOs, presidents and business owners encounter cash flow problems?
It’s not that anyone plans a cash flow problem. Often, it happens for a variety of reasons and can be quite common in business. The key is to be aware and mindful that it can and does happen. Without cash flow you can’t run your business efficiently or effectively.
Without Cash Flow The Business May Not Exist
Your company has bills to pay to stay operating. If the business doesn’t have the cash coming in on a timely basis, the bills won’t be paid – or at least, not on time. The company could be doing what is considered great business but if your customers aren’t paying you for 30/60 or 90 days yet there is a volume of business happening, you may not have enough cash to meet, for example, payroll. Employees not receiving paychecks on time is a situation you do not want. It will only then lead to rumors about the viability of the company. Employees may begin to search for other jobs. You will experience more business stress as you seek ways to balance the cash flow.
As a CEO, president or business owner, you really need to analyze how much cash is needed for the business to operate efficiently, effectively and at a profit over a 90 or even a 120 day period of time.
Ask yourself:
- Does it take 30 – 60- 90 – 120 days to collect the company’s receivables?
As you know, there are customers who will pay promptly in 30 days; others take 60 days; still others, for whatever reasons, are slow to pay and can sometimes make it challenging to get the invoices paid.
Customers most often always pay but, remember: You have bills to pay too. The payroll, the electricity, the phone/internet bills, vendors and all the other bills that go with running a business need to be paid on time. If not, it’s guaranteed the electric company will not leave the lights on for you after a length of time goes by.
Let’s add one more important bill to pay on time: Taxes. Always pay any company owed taxes on time. Don’t use tax money to pay for something else. The last thing you need is to have someone walking up to your office door regarding taxes not being paid. It could put you out of business depending on how much is owed.
How To Make Certain There Is Proper Cash Flow
How do you prepare for those times when cash flow may not be meeting the needs of the business?
Answer: Secure a line of credit.
The best time to obtain a line of credit is when business is good to great not when it is fair to uncertain; or even, bad. Go talk to local banks and explore what is available to you for your business. The bank is always wiling to give you a line of credit when business is good; when business is strong.
Consider a line of credit to act as a financial backup. If your receivables aren’t coming in on time, if you have more receivables out there than you could have imagined, or you need to make, for example, an equipment investment for your company, then it may be appropriate to borrow from your line of credit. The interest applied to the amount of money borrowed is a cost of doing business to keep you in business. Just remember, you are making a temporary loan to your business and need to pay this loan back as soon as possible to remain in good standing with your bank. It’s important to understand how much money you need to run the business and for how long you’ll need the cash loan when considering how to best utilize a line of credit.
As a business advisor and strategist to CEOs, presidents and business owners, I talk with businesspeople from New York to California every day. Business leaders are telling me:
- how great business is
- how busy they are
- how successful they are.
What happens when you are successful in business?
The company makes a profit.
You need to guard that hard-earned business profit.
I know you want to live a prosperous life.
Live in a nice house.
Drive a nice car.
Take vacations with family and/or friends.
Contribute and do good within your community.
But to do that, you need to ensure there is the appropriate amount of money in the business bank account, so your company continues to be cost effective in operations.
Nothing is more tragic than having a successful company that goes out of business because:
– payroll can’t be met
– expenses have grown
– there are more receivables than can be imagined but the money is not coming in fast enough.
So now there is a business problem: Where to get the necessary cash?
Sometimes businesses end because they couldn’t pay their bills despite making a profit and having what would be considered a good year. It happens because of cash flow. As a CEO, president or business owner you need to be aware of company finances and be prepared for times when cash isn’t flowing through the business as you would like.
Look at your financial statements monthly. Know what it means to have cash. Understand how cash is the energy of the business to make it work. Even if you are profitable; even if you have a great backlog of receivables, if it takes time to collect that money the company could be in real financial trouble if unable to weather through the storm. If that happens, there goes the great life you’ve worked so hard to create. Suddenly, your world is a whole lot more stressful than you would like it to be.
- Get a line of credit
- Build cash when business is good and cash flow is steady
- Make certain expenses are appropriate
- Don’t have business expenses creep up.
Success Doesn’t Equal Cash Flow
What often happens to businesspeople is that as the company becomes more successful, the expenses are not given as much attention. Let the good times roll, so to speak. Then expenses just get bigger and bigger and bigger! Costs add up quickly. Easily can drain cash reserves and what cash flow there is. Business profit is diminished or disappears completely.
When business is good and cash flow is rolling in, you may not notice where the problem areas or gaps are in the business. Then when cash flow, for example, slows you may find yourself asking: How did this happen? How did expenses get out of control?
The answer is: Not paying enough attention to the details of the business.
Remember:
- Always be constantly paying attention to the details of your business.
- Pay attention to the financials.
- Pay attention to sales.
- Pay attention to receivables.
- Pay attention to the rhythm of the cash flow in your business.
- Only use lines of credit for temporary cash flow. If you have to pay the bills with it you have a problem.
To your success!
Business expert and strategist, Howard Lewinter, guides – focuses – advises CEOs, presidents and business owners throughout the United States across a wide range of industries, to MORE success – MORE profit – less stress. Business people trust Howard’s vast business knowledge, practical advice, intuitive insight and objective perspective to solve business problems and issues. Get MORE from your business! Talk business with Howard: 888-738-1855.
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