According to statistics released by the American Business Employment Dynamics, 20 percent of small businesses fail within their first year.
Of that number, half close down during their fifth year.
These facts, however, should not dampen your dreams of making your business venture grow and thrive.
The key here is looking at the different facets of your company as well as the factors that may undermine its health and wellbeing.
Chief of these factors is your company’s cash flow.
How poor cash flow affects a company
Poor cash flow can affect a small business in a number of ways.
For one, it can hinder a company’s ability to fulfill its financial obligations, including paying for overhead expenses like utility bills. In some instances, some companies resort to taking out loans to cover these expenses.
You should also be aware that late payments for loans and other obligations can adversely affect your company’s credit ratings.
Another drawback of having poor cash flow is that it inhibits the ability of a company to take advantage of significant business growth factors like investment opportunities, new technology acquisition, business expansion, focusing on R&D and hiring top-caliber talent.
Companies with restricted cash flow may also need to cut some corners. And one of the areas that often suffers is a company’s marketing budget. In turn, this impacts the business’s ability to draw in new customers and, ultimately, hinders growth.
Managing your company’s cash flow efficiently
Keep your personal and company finances separate
It may be convenient for you to keep both your personal and business finances together in a single bank account.
However, this can lead to complications. Specifically, it will be harder for you to determine how your business is performing.
It is not necessary that you look for another bank. You can even open an account from the bank where you secured a car loan from. However, it is highly recommended that you choose a bank that caters to the needs of SMEs.
Keep your books updated
You cannot accurately monitor the financial health of your business if your accounting information is not updated on a regular basis.
Allocate ample time to update your books regularly. Or if your current financial standing allows you to, hire someone to do this critical task for you and your company.
With the right information readily available, you can attain a high degree of agility and flexibility when it comes to making decisions for your business.
Simple is better
While there are specific basics that you need to master and understand in the field of accounting, that does not necessarily mean that you have to overcomplicate matters.
Keep your accounting system simple yet effective by identifying key business metrics early on.
Be strict but fair to your customers
Customer payments are the lifeblood of a business. And when these payments trickle in too slowly, it is your business which will inevitably suffer.
Be fair to your customers and extend them a few courtesies. However, you must draw the line when it comes to the financial wellbeing of your business.
Monitor the influx of payments and take prompt action when the money coming in starts to slow down.
Keep a rainy day stash
Part and parcel of running a business is the fact that there will be things beyond your control.
What you can control is your company’s cash reserves.
Saving money for the rainy days will allow you to overcome unexpected problems while enabling you to gain confidence in your business’s ability to take advantage of opportunities.
Effective management is key
Poor management — be it in the field of financing, production, or employee management — can lead to the closure of a business.
Take particular care in identifying areas of weaknesses and bolster these. For example, if you acknowledge that you have limited knowledge of and/or experience in handling finances, take the necessary steps to correct this problem.
This can mean taking classes or hiring professionals who know exactly what to do. In turn, this will allow you to stave off potential problems in the future, including poor cash flow, which can shorten the lifespan of your business.