Profitable Small Businesses May Still Run Out of Cash

The number one reason for business failures is cash flow problems.

Your business can be profitable, and still be unable to meet obligations due to cash flow problems.

Many small business owners are surprised when they learn: profits don’t guarantee cash in the bank. You can be profitable on paper and still struggle to pay bills.

The reason is timing. Small businesses are often stuck between a rock and hard place. Tou have expenses that must be paid with little to no room to delay payments without serious consequences. Yet on the income side, there can be delays causing cash to arrive weeks or months late.  I once had a global corporate client that would not only pay after work was completed, but they added a 4 week acceptance period to decide if they accepted the finished product or not.  On top of that, they would only accept paper snail mailed invoices sent to their corporate headquarters in another country. But headquarters only logged receipt of the invoice and then sent it to another office in yet another country for processing.  They then used the receipt date in the processing center as the start of the time clock for them to pay.  Clearly a deliberate delaying practice that resulted in a contracted net 30 terms extending out to anywhere from 90 to 120 days before payment was received.  I know of another global corporation that had intricate guidelines for submitting invoices.  A friend who had them as a client often complained that it would take numerous revisions of every invoice before this client would accept it.  The process was so complex that modelling a subsequent invoice after a prior approved one provided no guarantee of acceptance. The result was up to 6 months to receive payment!  Less severe but still very annoying, I had yet another global corporate client that outsourced the payment processing to a third party.  While this was touted as efficiency and cost savings for the client, the companies providing services and goods to the client had to pay this third party for their services.  What these companies neglect in their short-sightedness is that these tactics add carrying costs that eventually need to be reflected in our pricing to them. Now these are extremes of dealing with large corporations that can throw their weight around.  But any customer who receives your goods or services in advance of payment can pay late, have checks bounced, or become uncollectable debt.  This doesn’t even begin to discuss income streams that are affected by seasonality or other exterior events outside of your control; weather is a prime example that affects timing of sales for many small businesses.

In the meantime, you have immediate expenses that must be paid.  From employee salaries, suppliers, taxes, insurance, utilities, loan payments, plus all the other ordinary and unforeseen expenses for running your business.  You need to have a really good handle on what expenses will come due when, in association with what cash will be received when.

For example, a business may show a healthy profit for the quarter, but if customers are slow to pay and a large tax bill is due, the bank balance can quickly turn negative.

This is why cash flow forecasting matters. A simple forecast shows when money is actually coming in and going out, giving you time to act before problems arise.

If you want a straightforward way to see this in advance, the cash flow workbook available at er2app.com is designed specifically for small businesses.