Recognize Poor Cash Flow.
Of the 30% of businesses that fail, the reason almost 82% of those businesses fail is because of poor cash flow management (or lack thereof).
What’s really unfortunate is that 70% of the failed cash flow businesses actually became profitable after their failure. A state that could have been avoided had these businesses taken action right away and managed their cash flow better on an ongoing basis.
If you’re reading this article and feeling embarrassed or have that sinking feeling in the back of your mind, you should probably be taking action and creating a plan regarding your cash flow. Don’t hold your ground on this one ─ you need to take action now before you become one of that 82%.
Here’s how to help your business become profitable after a cash flow failure (or avoid failing completely).
You may have heard the statistic that many small businesses fail within the first five years. But what we don’t hear is that the reason for this failure is a lack of transparency into their cash flow and a lack of knowledge/expertise with regards to turning this flow around!
Now, the reasons for poor cash flow in small businesses tend to vary. But most fall into one of these categories:
- Poor cash flow management/poor understanding of the flow
- Starting with too little money
- Lack of business plan/poor research
- Improper pricing strategy
- Improper forecasting of sales
- Not seeking professional help or recognizing areas where help is required
Luckily, now you know that you can turn to your CPA or Fractional CFOs that can harness cash flow forecasting and scenario modeling software, like Dryrun, to deliver up-to-the-minute, crystal-clear forecasts.
But even before you start worrying about bills, the easiest way to tell if you have a cash flow problem is whether your expenses exceed your cash on hand.
In the early stages of business, it is normal for expenses to be higher than revenue. Especially when it comes to marketing, sales, admin, R&D, and anything else you must consider as an operating cost before your business is established. But no matter where you are in your business, your expenses should never exceed your available cash.
Here are 3 ways to manage your cash flow so that your expenses do not exceed your cash on hand:
- Categorize spending
You need transparent insight with regards to what money you’re spending and what you’re getting out of it. Work with your CPA to determine categories for your expenses and see if anything sticks out as odd. You might need to look at the % spent in each category, not just the dollar amount.
- Use benchmarking
To see whether you’re on track, behind, or way ahead of your spending, you need to set benchmarks against other businesses in the industry and see whether you’re executing at a similar level. You definitely don’t want to be ahead (spending more cash than you have), and if you’re not seeing as much growth but are behind on spending, this could give you a good idea why. Adjust accordingly depending on where you want your business to be and on the available cash, but make sure the adjustments are justified and outcomes are measurable.
- Micromanage spending
This part doesn’t seem as fun as benchmarking and adjusting but sometimes, it’s necessary. If you’re overspending a good way to keep track of this without getting too far ahead of yourself is by “nickel-and-diming” yourself.
You should be tracking all your expenses anyways, in order to know what to charge, but if you suspect your cash flow is somewhat limited or lagging, you need to watch every single cent. All money spent is subtracting from your profit margin so it’s extremely important to consider the financial impact of every dollar you spend while your cash flow is struggling.
Harness the Power of Dryrun Software for Cash Flow Management
Understanding and managing your cash flow is critical to your business's survival and growth. Without precise cash flow forecasting, businesses risk running into financial trouble, potentially leading to a difficult or even untenable situation. However, by incorporating strategic planning and regular reviews into your financial management process, forecasting becomes an essential and manageable step toward ensuring your business's longevity and success.
Focusing on both short-term and long-term cash flow forecasting is vital. Aligning your business goals with your financial strategy, including planned expenditures, requires ongoing collaboration with your financial advisors or CPAs. This collaboration ensures that your spending is both strategic and justified, helping to foster sustainable growth.
With nearly a third of small businesses in the US citing cash flow as a significant future challenge, it's clear that effective cash flow management is more than just a good practice—it's essential for staying ahead of potential issues that could threaten your business's survival.
If concerns about managing your cash flow are keeping you up at night, or if you're seeking strategies to minimize expenses and ensure sustainable growth, it's time to consider a more sophisticated approach. Dryrun is here to help. Our software specializes in simplifying cash flow forecasting and management, offering clear, actionable insights that enable you to plan with confidence and adjust your strategies as needed.
Don't let cash flow uncertainties dictate your business's future. Contact us for a free consultation and discover how Dryrun can transform your approach to financial management, preparing you for whatever lies ahead.
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Dryrun delivers real-time, dynamic cash flow and revenue forecasts with complete manual control and unlimited scenario modeling.
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