Cash flow the nr 1 small business obstacle

 

Cash flow problems

What is the nr 1 problem in a small business? 

If you run out of money, you don't have a business.

We work mainly with small to medium businesses, and most of the more than 25 000 businesses on MyCityInfo, are small to medium businesses. And whenever we speak to them about their headaches, cash flow is number one.

Or rather, the lack of cash flow. Because in a small business, cash flows out three times as fast as it flows in.

Search the Internet for "small business problems" or any such term, and you find as many views as there are writers. Most do not start with cash flow. Many, especially financial magazines get their comments from consultants who come up with "solutions" such as "service will solve all your small business problems", or "get a mentor", or "get more visitors to your website", or whatever the consultant sells.

We think we should start at "why did you start your business?" and then you can expect entrepreneurs to enthusiatically address you at length about how it is their passion to sell what they make or do. That is not our experience.

Most small business owners started their businesses because they could not get a job - especially in South Africa, because of a variety of factors. Entrepreneurs also start new businesses because they want to make more money, have more freedom to plan their lives, or think because their product or service is important to them, it should also be important to potential buyers. None of the three are considered valid reasons by people who sell advice to small business owners. But that is exactly why people start their businesses, and if consultants, advisors and academics do not accept that, their advice and support will not help the entrepreneur at all.

Add to this that advice is not free. So, whoever helps small business owners to succesfully plan and manage their businesses, have businesses themselves that need to be profitable. That is why so many small business owners looking for advice, are frustrated. If the solutions to my problems, and the advice I get, all relate to factors that are not my greatest obstacles, then there must be something wrong with me. Whether I need to practise conventional advice such as "the client is always right" (which is not true), or "networking is the way to get business", (which is often applied the wrong way) or "sponsor local events to get exposure" (although I don't have money), none of those helps me in any way as long as I don't have money in my pocket to pay for whatever I need (it could be this month's groceries - which is another way to say that I need to pay myself a salary).

How can you pay yourself a salary when you don't have money?

Oh, that's easy! Haven't you read about the successful start-up where the owner did not take a a salary for three years? Only question I have is: what did he eat, and where did he stay? And the answer is that they all had either cash in the bank or a super-duper family, or other support structure. It's nonsense that you can work without an income. It is true that you can work without an income from your business, but then you have to have another source.

Now, with that little rant, let's return to cash flow.

In the US, cash flow, or the absence of cash flow, is the main reason why small businesses fail. (Image from The Visual Capitalist)

Why small businesses fail

Cash flow problems, if I understand the advisors and solution providers correctly, are a combination of factors such as high overhead expenses, slow paying customers, too much inventory, too much bad debt or too low gross margins. Here is an interesting article about getting over obstacles in your small business.

What if you started your business because you had no other avenues to exploit?

You cannot find a job (in South Africa often because of racial legislation), you are too inexperienced, or too old (the company can get a younger - less expensive - person to do the job) or whatever the reason. So what do you do if you have only your skills?

You get involved in the family business, if there is one, or you start your own business.

But the one thing you will probably not have enough of, is cash.

Try the bank or whoever finance businesses, and you will find out that money is only available to the entrepreneur who does not need it. There are, of course, loan sharks who charge maximum interest. But if you use exhorbitant expensive loans to solve you problem of no security, or to keep your cash flow running, you will run into difficulties that this article cannot solve.

So what do you do?

I don't have the solution for you, that will work just for you in your unique circumstances. 

The best advice I have come across was a quote by a venture capitalist who said: if you don't make a profit, you don't have a business.

When I did the research for this article, I found why some people say that the Internet is the biggest collection of bull dust. Most advisers give advice in order to sell something else. Which does not mean it's bad advice. But read and listen with a critical mindset.

It does help to do some reading to get your mind working on the solution to your "profit problem" or cash flow obstacle. A good place to start are entrepreneur websites. Just don't believe everything you read. Especially on Youtube you may find that the exhuberant excitement of the presenter is sometimes used to hide flimsy content.

So, let's assume you have a business, but you find it difficult to keep your cash flowing in a healthy way.

A good start when dealing with a problem or obstacle is to eliminate the negative influences first. Anything that threatens or cancels out the result you strive for, is a negative influence.

In a cash flow problem in a small business, the threats would be things like inadequate sales, overspending by the owner, bad debtor management.

The main threat will be inadequate sales. If you don't sell enough of your product or service, you cannot generate enough money to cover the expenses or the cash outflow.

If you don't make a profit, you don't have a business.

The first step towards healthy cash flow will then be to sell enough. And that is exactly where we often see small businesses fail.

It is a vicious cycle:

  • start a business based on whatever you know or have experience in;
  • try to sell the product or service without sales experience or skill, or try to sell a product or service for which there is not enough demand;
  • generate inadequate sales;
  • result in inadequate cash;
  • business falls behind with payments;
  • owner injects money into the business from other sources;
  • eventually money runs out and business fails.

Which is an elaborate way of saying that cash flow problems in micro and small businesses quite often are founded in an absence of sales skills.

So, how do you solve the problem?

More to read:

about small business in South Africa

Small business pitfalls
 

If you're a successful small business owner, let me know how you got over this obstacle.