Recently, I have talked with several clients who really have no idea what state their business is in financially, but they know they need a loan. These are not a small sized businesses, they turn millions of dollars a year and the leadership is smart talented people. But when I ask for a balance sheet or income statement, they look at me like I have two heads. Which prompted me to write this blog. Study after study shows 80-90% of businesses that failed cite a lack of cash flow as the primary factor. And a growing percentage of that population, the business owners took whatever funds were left and vanished. They didn’t close the doors. They didn’t sell. They literally took the money and ran. This should be alarming to you as a business owner because you do not want to get caught up in their negative downward spiral.

Cash flow refers to the amount of money that flows in and out of a business. Positive cash flow occurs when the amount of money coming in exceeds the amount of money going out. Negative cash flow, on the other hand, happens when the amount of money going out is greater than the amount of money coming in.

Of course, cash flow is the lifeblood of any business. Without enough money coming in, it becomes challenging to pay suppliers, employees, and other essential expenses, leading to financial strain and eventually, failure. This statistic underscores the importance of managing cash flow effectively in any business. Maintaining positive cash flow is crucial for the survival of any business, and it requires careful planning and management. Sounds like common sense, right?

However, cash flows cannot be seen on your profit and loss statement. P&Ls can tell you if your are making money, but it cannot tell you the cash flow through your business at any given time. So businesses that are not paying attention to their cash flows can find themselves in a cash crunch, and not be able to make payroll, or they start paying vendors 30 days late, or 60 days late, and at 90 days, they are insolvent.

One of the most common reasons in today’s market that companies run out of money, is they simply aren’t paying attention. “Revenue’s are higher than last year, so I’m good, right?” Actually, no. Expenses are up too due to inflation. Inflation has a sneaky way of creeping up on you and eating your profits, and nibbling away at your reserves or dwindling your equity. So without knowing it, business owners keep the same ole spending habits without realizing it is causing a cash flow problem. Conversely, they may know there is a problem, but feel helpless to do anything about it.

One of the contributing factors is business owners have been struggling for the past couple of years and are tapped out of new ideas, much less holding the emotional strength to keep trying. While this may not be you, it might be one of your suppliers, clients, vendors or other small businesses you depend on to operate efficiently. And that can be a surprise to your business operations when an unplanned event hits the bottom-line affecting your cash flow.

Another common reason why businesses experience cash flow problems is because they have too much money tied up in inventory or other assets. Inventory costs money to acquire, store, and manage. If a business has too much inventory or other assets like real estate, it can tie up valuable cash that could be used for other expenses. This can lead to cash flow problems, especially if the inventory isn’t selling quickly enough to generate revenue. We call this asset rich, but cash poor.

Further reasons are lack of effective billing and collection processes. In good markets, people mostly pay on time. In down markets, late payments from customers can have a significant impact on your cash flow, as it delays the arrival of money that’s needed to pay bills, pay payroll and cover other expenses. It’s important to have a system in place for invoicing customers promptly and following up on late payments. making notes as you go to create a history of conversations.

In some cases, businesses can also run into cash flow problems due to unforeseen circumstances, such as a sudden drop in demand or a supplier going out of business. These situations can be challenging to manage, but having a contingency plan in place can help businesses weather these storms.

To avoid cash flow problems, businesses need to plan and manage their finances carefully. This includes regularly reviewing financial statements, look for trends up or down in every line item, forecasting cash flow needs, implementing effective strategies for managing inventory, collecting payments from customers and staying in contact with your business partners. If you are not already reviewing a monthly cash flow statement, it is recommended to add it to the monthly financial statement reviews and course correct while it is a manageable situation. If you are not in a regular routine, now is the time to start as well as have a contingency plan in place to deal with unexpected events that can negatively impact cash flow.

A contingency plan may be seeking a working capital loan or line of credit that is your rainy day fund. Of course, apply for a loan when you do not need it, because waiting can cause a situation to go from a little need to sorta critical to a desperate situation in an instant.

Only the 18% of business owners who plan for their business cash flow will live to see the next boom. By implementing sound financial management practices, businesses can minimize cash flow problems and position themselves for long-term success. Are you in the lucky 20%?