Growing Your Business

82% of Businesses Fail Due to Cash Flow Problems. Here's What You Need to Know to Be One of the 18% That Survive  

by
Julie Farless
on
10/15/2017
82% of Businesses Fail Due to Cash Flow Problems. Here's What You Need to Know to Be One of the 18% That Survive  

According to a study that was recently conducted by U.S. Bank, an incredible 82 percent of businesses fail for the same reasons: cash flow problems. They simply don’t have the insight into “money in vs. money out” that they need to make the best decisions possible to positively influence that ever-important bigger picture.

Luckily, hope is not lost. The 18 percent of businesses that do succeed don’t do so because they’re business, financial or mathematical geniuses. It’s simply because they’ve been able to avoid some of the costly mistakes that lead to cash flow troubles in the first place.

Your Cash Flow and You: Important Things to Consider

There’s an old saying that tells us: “You have to spend money to make money.” While true, it could perhaps stand to be a little more specific: “You have to spend the right money in the right way to make the right money at the right time.”

This leads directly into perhaps the biggest mistake that often contributes to cash flow issues ― if you fail to properly budget, you’ll be making long-term decisions based on inaccurate data. Much of your budgeting will be based on sales, for example. If you overestimate your sales, the proverbial “house of cards” comes tumbling down almost immediately. Money you thought you would have won’t be there, and thus, you won’t be able to make the strategic moves you need to survive in the long term.

Along the same lines, spending business funds like you just won the lottery is another one of the biggest mistakes that you can make. Your spending needs to be properly aligned with your long-term goals, and every dollar that goes out of your company needs to bring something back into it, be it new customers or product innovation or something else entirely. You need something to show for the money you’re spending, or you shouldn’t be spending it in the first place.

Another one of the biggest mistakes that people often make that contributes to cash flow problems involves not having a proper invoicing system in place to get paid as quickly as possible. Many people fail to realize that typically, they’re getting hit with the cost of doing work before they actually get paid. Clients already take a long enough time to pay on their own ― they don’t need the added excuse that you don’t have a financial system in place that lets you track which invoices are where, who owes you money and which accounts are totally reconciled.

The better your invoicing system, the faster you can get those invoices out to clients. This, in turn, increases the speed at which you can get paid, which itself increases the rate at which you have mission-critical funds coming into your business. This not only avoids costly supply chain delays but also guarantees that you have the cash on hand necessary to take advantage of certain opportunities as they present themselves.

At this point, the recurring theme throughout all of this should now be clear. It’s not the fact that 82 percent of businesses fail due to cash flow problems because cash flow management is the most difficult, time-consuming, frustrating hurdle you’ll have to overcome as a business owner. It’s because of the simple fact that many of them never planned and implemented cash flow best practices in the first place. That “do-it-yourself entrepreneurial spirit” will carry you far in the world of business, to be sure ― but this is absolutely not one of those cases.

If more business owners recognized the fact that cash flow is so essential from the beginning, and if more of them worked to find the right financial adviser as early in the process as possible, it is absolutely no question that these statistics would look far, far different from what they currently do.

Martinez & Shanken, PLLC writes for TaxBuzz, a tax news and advice website. Reach the firm at [email protected]

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Julie Farless

Julie Farless

Martinez & Shanken, PLLC is a Certified Public Accountant (CPA) firm based in Gilbert, Arizona. We provide a full range of accounting, bookkeeping, consulting, outsourcing and business services, but we specialize in tax preparation. We work with you to ensure that your personal or business processes are conducted in a manner that ensures ongoing integrity in your financial transactions. We are available to answer your questions and help with your ongoing tax planning and changing business needs.

Deborah Martinez & Earl Shanken
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Arizona

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