Visual Capitalist has put together an interesting infographic on why small businesses fail. While we think this graphic has lots of good information, it doesn’t tell the whole story.
For instance, 82% of businesses experience cash flow problems. This is listed as a cause of failure, but what causes the cash flow problems? In our experience, cash flow problems stem from one of the following issues:
- The business owner does not understand how to manage the business’s cash (owner incompetence),
- The owner uses the business as a personal ATM, siphoning funds – often unrecorded – outside of or beyond an owner’s draw (owner fraud), or
- The owner chooses to pay for things in a way or on a schedule that is detrimental to the business (mismanagement of cash).
An example of owner incompetence might be failure to track down and collect receivables or remitting accounts payable on the payee’s schedule, and not on a schedule that is beneficial to the business. Every business owner should understand the principles of cash flow and how proper management of cash can strengthen or harm a business.
An example of owner fraud might be use of cash from the register to purchase groceries on the way home from work. Seems harmless enough. After all, it’s the owner’s money, right? Wrong! Just because there’s cash in the drawer does not mean it’s to be used at the owner’s pleasure. Many times a business owner finds out too late that they’ve robbed their own business, starving it for cash to pay for personal items. It’s best to determine your personal budget, write yourself a paycheck, and pay for personal items from those funds. Your business is not an ATM.
Owner mismanagement is fundamentally different from owner incompetence, because mismanagement is willful. If you fail to sequester sufficient funds to pay your taxes, that can be attributed to incompetence. But if you choose to pay your rent a year in advance in one lump sum, that is mismanagement. Doing so may give you comfort knowing you won’t have to think about rent for a while, but what happens when you have a major unexpected expense in three months, and your cash is in your landlord’s bank account?
Sure, the line can be blurry, but it comes down to knowledge and choice. If you know you should hold onto some cash to pay a critical expense, but you choose to do something else with it, you are mismanaging funds.
If you need help getting a handle on your cash flow, we at Sequoyah Fund are available to help you. We’ll teach you the basic principles of how cash works in your business, and we can help you set up systems in your business to track and use cash in ways that help your business grow.
Call Hope Huskey at 828-359-5005 to make an appointment, and let’s get your cash flowing in the right direction!