Cash-flow. Simple as that. Cash-flow.
Small businesses are amazing. They say they are the backbone of our country and provide virtually all our jobs. Per the SBA - There are over 28 million small businesses which make up 99.7% of US employer firms.
Of these 28 million businesses - half of them are based out of the home! (1)
Now why is it that so many go out of business? There are many variables, and no two business are alike, but one reason is cash-flow.
Cash-flow is the movement of money in and out of a company. Quite simple right? You just need to keep the money coming into your company over the years equal to or more than the money going out. Done, you have a successful business!
The catch, however, is many businesses really struggle with this. Sales leading to revenue and mixing in expenses to get to net-profit is only part of the equation. You can be extremely profitable and still have negative cash-flow. Same with the reverse - you can lose money every year and still remain in business if you are cash-flow positive. How is this?
Let's look at an example - Uber - how long did it take them to become profitable? Well we still don't really know - they are not profitable! So how are they in business? They have positive cash-flow from investors.
OK, so Uber and other companies get a lot of inflowing cash, but what about me and my company? I don't have investors, so how could I make a profit but still have negative cash-flow?
This is a common question and the answer lies deep in the Balance Sheet. Most small businesses run exclusively on the Profit & Loss Statement (aka Income statement). The BS shows your loans, accounts payable, accounts receivable, and cash in the bank. If the timing of these things are not in the proper order, you will run out of cash even if you have a lot of Profit. That is why they say Cash is King.
You may be making lots of sales and your AR is going up fast, but if it takes too long to collect from your customers, you may not have cash in the bank to make payroll or the rent next Friday.
All pieces of a business are key, but this is absolutely sure for Cash-flow!
(1) https://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf
Small businesses are amazing. They say they are the backbone of our country and provide virtually all our jobs. Per the SBA - There are over 28 million small businesses which make up 99.7% of US employer firms.
Of these 28 million businesses - half of them are based out of the home! (1)
Now why is it that so many go out of business? There are many variables, and no two business are alike, but one reason is cash-flow.
Cash-flow is the movement of money in and out of a company. Quite simple right? You just need to keep the money coming into your company over the years equal to or more than the money going out. Done, you have a successful business!
The catch, however, is many businesses really struggle with this. Sales leading to revenue and mixing in expenses to get to net-profit is only part of the equation. You can be extremely profitable and still have negative cash-flow. Same with the reverse - you can lose money every year and still remain in business if you are cash-flow positive. How is this?
Let's look at an example - Uber - how long did it take them to become profitable? Well we still don't really know - they are not profitable! So how are they in business? They have positive cash-flow from investors.
OK, so Uber and other companies get a lot of inflowing cash, but what about me and my company? I don't have investors, so how could I make a profit but still have negative cash-flow?
This is a common question and the answer lies deep in the Balance Sheet. Most small businesses run exclusively on the Profit & Loss Statement (aka Income statement). The BS shows your loans, accounts payable, accounts receivable, and cash in the bank. If the timing of these things are not in the proper order, you will run out of cash even if you have a lot of Profit. That is why they say Cash is King.
You may be making lots of sales and your AR is going up fast, but if it takes too long to collect from your customers, you may not have cash in the bank to make payroll or the rent next Friday.
All pieces of a business are key, but this is absolutely sure for Cash-flow!
(1) https://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf
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