Most businesses fail within the first 5 years.
Ask google or siri, “how many businesses fail within the first 5 years” and you’ll get an interesting answer. If you get what I got, then the answer is that according to the Small Business Administration (SBA), about 30% of new businesses fail during the first two years, 50% during the first five years, and 66% during the first 10.
So in order to make it to the 34% that are still in business after 10 years, you first have to be in the 50% that make it beyond five years.
During the video above you will see me demonstrate a few examples of how you can use CashFlowTool.com to monitor critical areas of cash flow to help you make it to the 34%.
Try CashFlowTool.com and see it in action.
The question is why do these businesses fail?
The answers can be many and a lot of them subjective.
Are they bad ideas? I would guess probably not. Most of them are probably good ideas.
Not profitable? Could be, but I would bet a surprisingly high percentage of the businesses that fail are profitable?
The number one offender on business failures has to be cash flow.
The reason is purely logic. If businesses had sufficient cash flow, they would continue to stay in business.
It’s only when a company can’t pay its bills that it goes out of business. Now that could be because they aren’t profitable, but plenty of profitable businesses experience poor cash flow.
The classic example is a highly leveraged company. They could be profitable, but after paying off principal from loans they’ve taken out, there can be little or no money left for working capital needs.
If you have a good handle on your cash flow, you can sustain losses. This is often the case with startup companies. They survive on financing from owners, investors, or banks. Of course the business has to turn a profit eventually.
Having a good handle on your cash flow may be the most important aspect of running a business successfully.
Have you ever looked at your income statement, seen a nice profit, and then asked yourself, “where’s all the money?” or, “why don’t I have enough to pay my taxes?”
The answers to these questions are always found in your cash flow analysis.
You start with your net income.
Maybe it’s $100,000.
But you don’t have nearly that much in the bank!
There are a few places where your cash can be locked up.
If you scan down the balance sheet you’ll find them.
If accounts receivable is increasing that means you are earning the income, but you aren’t collecting it. That’s a problem.
If any asset on your balance sheet is increasing that means you are tying up cash in something. This isn’t necessarily bad. So you have to look at it.
If you’re tying up cash in inventory because you are stocking up for the holidays that is good. If you are using your normal working capital to do this, then you will want to line up some financing to cover your financial gap.
There are specific formulas around calculating how much cash you need in the bank at all times. And these are good to know, but the reality is there are tools that do this for you much faster than you can and with a much lower (or no) risk of error.
We’re in an age where we need reliable data and we need it fast.
Getting this data is what will keep us in the 34%.