If you are like most small business owners, your biggest fear is going out of business. Not only is it hard to fathom having to layoff all of your employees and close up shop, but having to let go of your dream of owning a successful business can be rather traumatic. Furthermore, the ramifications to your employees, your family, and yourself are also hard to deal with.
According to the Small Business Administration, 30% of new businesses will fail in the first two years. After that, 50% will fail within 5 years, and 67% will fail before they hit their 10 year anniversary. After 10 years in business, only 25% of businesses make it to 15 years in business. With statistics like that, it’s amazing that entrepreneurs even start businesses!
You may be wondering at this point what the major cause of business failure is, and what you can do about it to make sure that you are one of the lucky few to make it. The good news is that there is one major reason for most business failures, and it’s something that is fairly easy to correct. Here’s what you need to know to make sure that your business not only survives, but thrives:
Why Are So Many Businesses Failing?
According to the Dun & Bradstreet Business Failure Index, 92% of all businesses fail for one of two reasons:
- A lack of financial management skills – ie poor cash flow issues
- A lack of marketing skills and knowledge
In my experience as a Business Coach, if a business owner lacks marketing skills, the business usually never gets off the ground in the first place. So, I’m going to focus here on what I see as the bigger issue, and that’s cash flow issues. Here are the top reasons why businesses have cash flow issues, as well as what to do about it:
Key Issue #1 – Lack of Knowledge, or No Knowledge, of Key Financial Metrics
One of the most shocking things that I see daily as a Business Coach is the lack of knowledge business owners have with respect to their financial numbers. If you are a business owner, and don’t know your way around your P&L statement, your Cash Flow statement, and your Balance Sheet, you will most likely find yourself in a financial crisis at some point in the life of your business.
The only way you can manage something is if you can track and measure it. So, if you don’t track and measure your business financial numbers, and know how to understand what the numbers mean, as well as what actions you need to take to affect your numbers, you need to get on top of this immediately!
Buy a copy of Quick Books, and find a skilled CPA that you can work with to set it up for you. Once you have this set up, you’ll need someone on your staff, such as a bookkeeper, that can make sure all of your financials are getting captured. Then you will want to review your numbers with your CPA on at least a monthly basis to understand where you are at. Additionally, as your business grows, you’re going to want to hire a solid CFO who can help you take action on, and maximize, your financial position.
Key Issue #2 – Lack of Funding for Your Business
Most businesses, especially in the early stages of growth, are inconsistent with their revenue streams. Additionally, as a business grows, cash is almost always necessary to fund continued growth over time. Unless your business is highly profitable and you are reinvesting all of your profits back into the business, as some point you are going to need more cash. This is a critical point that many business owners don’t anticipate. In the best case scenario, it can stifle growth. In the worst case, it can spell disaster.
The key solution for this problem is to make sure that you have a solid relationship with multiple bankers, as well as angel investors and venture capital firms. Depending on the size of your business, all of these relationships will come in handy at some point. You want to make sure that you are fostering these relationships before you need the money, because if you wait until you need the money, it’s usually too late.
Key Issue #3 – Mixing Business and Personal Funds
I see many business owners these days making payroll by taking out a 2nd loan on their house, putting business expenses on their personal credit cards, and mixing business and personal expenses. There is a huge risk to this, as if your business fails, you could lose your house, your personal credit rating, or even worse. Additionally, when you mix business and personal funds, you can create a nasty legal situation for yourself by “piercing the corporate veil”, which may remove the legal protection that your business provides you, thus exposing your personal assets to any lawsuit brought against you. You can also put yourself at risk with the IRS if you happen to get audited.
Never mix your business and personal assets. Keep separate accounts and credit cards for your business, and if you infuse your own cash into the business, make sure that it’s properly documented.
Key Issue #4 – Out of Control Business and Personal Expenses
There are always two sides to cash flow issues – revenue generation and business expenses. Many businesses get into cash flow issues simply because their costs are out of line with respect to revenues. Once a business starts to have some success, it’s easy to start increasing payroll, benefits, and other overhead such as extravagant offices or travel. Employees can also start to spend money in extravagant ways, especially if there aren’t any procedures or rules for controlling expenses. I’ve also witnessed many business owners who start to live pretty lavish lifestyles outside of work, leveraging their businesses to the hilt in order to fund a lifestyle that they can’t afford. Of course, over time this usually leads to disaster.
Know your numbers, and keep your costs in line with your revenues. It’s helpful to know what a good cost/revenue ratio is for your business, and stick to that. Have expense controls and procedures in place for employees. Also, keeping the profits to reinvest in the business is always a good idea. Have your CPA and/or CFO keep you in check.
If you have a good CPA and/or CFO in place, and you know your numbers, you can avoid the pitfalls that can lead to poor cash flow and financial problems in your business. By following the tips above, you’ll be well on your way to being one of the top 25% of businesses that make it past 15 years.