Cash flow is of the utmost importance to small businesses. The Australian Bureau of Statistics has reported that within the first three years of starting, over 60 per cent of small businesses have to shut their doors, suggesting that maybe SMEs don't have a grasp on their financials like they thought they might.
82 per cent of startups and small business failure is due to inadequate cash-flow management
These statistics are startlingly high, but it hopefully serves as a wake up call for new business owners: starting and growing your business is not going to be a walk in the park. Here are four major financial reasons as to why SMEs fail, and how they can achieve better overall management of clients’ payment plans and their effect on your business.
- Unrealistic expectations
When you think about all the major brands in the world - Facebook or Apple - you have to remember that none of those businesses blew up overnight. Businesses that fail to recognise that it takes time to develop a business run the risk of burning out their resources too quickly. That's why you'll need to develop a thorough business plan that also has enough flexibility to shift with a changing market over a long period of time — even ten years. A business plan of this nature should include:
- Mission and strategy
- Development financing
- Sales and marketing tactics
- Market summary
- Resourcing plan
- Financial forecasts
Financial forecasts are really going to dictate what you can do with your business, but many companies struggle to put theirs together.
Don't let your small business become part of the failure statistic.
- Managers inadequately map growth projection
Once the money starts coming in, you need a plan as to where it is all going to go. Investing in the wrong areas of your company will only stunt success. Growth can be tracked and predicted via quantitative forecasting in order to give them a practical and tactical plan moving forward. This type of forecasting involves using the past revenue data of both you and your competitors (especially in your first couple of years as you may not have much data of your own to work with) to have an idea of when and where you can optimise sales. Overall, it should include:
- Income statement
- Balance Sheet
- Cash flow forecast
- Capital requirements
- Working capital
Tracking all of these can be easier said than done, however.
- They don't keep adequate records of financials
Organisation of financial records is critical to SMEs. Bookkeeping should monitor all internal and external transactions so businesses owners can get an idea of where the money is being spent. This way, business owners can analyse the reports to assess if the cash can be better used in another area of the company or not. Bookkeepers should be providing business owners with regular financial forecasts of the information we provided above.
Each week, SMEs should be reviewing the following cash flow information:
- Accounts receivable and payable
- Profit and loss statements
- Purchase orders
- Balance sheets
Newer businesses give some of their customers too much credit.
- Businesses give customers too much credit
Both literally and figuratively, newer businesses give some of their customers too much credit. It can be tempting to pick up a client just for the money, but without a proper credit history check, you don't know if you can trust your clients or not. Some businesses will bend their rules just to land a sale, using strategies like providing prospective customers with a more generous credit term than you would with any other customer.
Be careful of this — while there is always a little bit of wiggle room, you really only want clients who can pay your fees without serious negotiations. Otherwise you risk not getting paid, an outcome that no small business can afford. Fortunately, we provide insurance that protects you from these negligent clients.
Ebook - Financial Flotaties: How to keep your head above water when debts go unpaid!
Chris Little, Commercial Director Coface ANZ