Finance expert James Steer reveals the main reasons businesses run out of money - and the three key changes that could help stop the rot.
Statistics show a fairly large percentage of small- to medium-sized businesses will fail in their first year. An even greater percentage will fail within five years. Why? The number one reason is cash flow problems.
Most businesses, even successful ones, will experience cash flow issues at some stage. Any business is at risk of running out of money if they don’t have backup funds they can draw on.
While this does sound alarming, it’s not all doom and gloom. If you know the reasons why businesses struggle financially, you’re more equipped to avoid those problems and you will be more able to run your business without major hiccups.
Here are the seven main reasons why businesses run out of cash:
Every business owner wants a booming business, but with growth comes increased overheads. When you grow your business, you have the cost of new staff, equipment, materials and larger facilities to contend with.
Usually, you’ll have to lay out cash for these expenses before you see an increase in revenue. If you expand too quickly and your finances can’t keep up, you run the risk of digging yourself into a lot of debt that you potentially cannot recover from.
Unfortunately, it’s common to see businesses deplete their cash supply rather quickly, only to have to wait for invoice or commission payments while the unpaid bills pile up.
2. Lending restrictions
Banks have always had restrictions on their lending criteria, so this isn’t a new problem for SMEs. However, banks have intensified their lending criteria and have put tougher restrictions in place since the GFC.
This makes it even harder for businesses to take out loans or raise their credit limits, and some banks avoid entire industries altogether. If your bank won’t help you out, you need an alternative lending solution in place.
Many industries experiences seasonal fluctuations, with booming sales periods followed by quieter times.
To breeze through these times, good budgeting skills are essential. It’s vital for business owners to save some money during boom periods to pay wages and expenses when times are not so prosperous.
4. Expenses not being monitored
Expenditure doesn’t remain the same year round, and as your business evolves, so too do your expenses. Perhaps your supplier costs have increased or you’ve spent more on marketing than normal.
These expenses must be monitored, because it’s easy to miss small additional expenses. They add up, and if your sales haven’t increased at the same rate, you could be headed for trouble.
5. Insufficient capital
A common business mistake is having insufficient capital or operating funds. It’s easy to underestimate how much money you’ll need and overestimate how much money will come in from sales.
The result is a business having to close before it’s had a fair chance to succeed. Remember, many businesses take a few years to get going.
6. Trouble securing new leads
Adjusting your expenses might be within your control, but you cannot regulate your sales quite as easily. Business changes constantly, and you need to be adaptable and update your business plan accordingly.
If you’re stuck in a rut and can’t seem to get out, something needs to change. Try some new marketing techniques, review what has worked in the past that you might have stopped doing and be prepared to do something outside your comfort zone.
Before you panic and file for bankruptcy, it’s a good idea to ask yourself these three important questions:
How serious is the problem?
It might not be as bad as you think. Look at your financial situation right now. How much money do you have in the bank and how much can you draw on easily from savings?
Make a short-term prediction of money coming in during the next few weeks and money due to be paid. This will give you an idea of where you’re headed and how fast you’re getting there.
Can you limit your expenses?
Take a look at your expenses and see which ones are absolutely necessary. Keep these going, but forget about any expenses that can be reduced or stopped completely for the short term.
This will slow down the rate at which you’re running out of money and hopefully avoid it occurring all together.
Is there a long-term solution?
When you’re rapidly running out of money, you often don’t have the luxury of time to evaluate what’s going on. Running out of money is a common business problem. You’re not the first to experience it and you won’t be the last.
An alternative such as commission advance is a perfect solution in any scenario. Since it’s available within a few hours of an approved application, it solves your short-term money problems. Once you work out where your financial problems are stemming from, it can be used as a long-term method of staying ahead.
Finding a sustainable solution is what good business decision-making is all about. That way you know you’ve got the upper hand and have a complete absence of cash flow problems.
James Steer is a real estate finance expert with nearly 25 years’ experience running businesses involved in the sale, management and development of residential property, and is the chief executive of Commission Flow.