Top 10 Reasons Businesses Fail Number 5 – Not Enough Money/No Cushion
Start-up and existing businesses are constantly fighting this issue of not having the necessary cash to continue to on operation when revenue is not steady. It’s important to realize that most businesses experience cyclical up and down sales cycles. These cycles can be daily, weekly, monthly, or yearly. Restaurants are an example of businesses that deal mostly with daily ups and downs. They tend to be busy during breakfast, lunch and dinner and slow at other times. Bars and Nightclubs experience weekly cycles. It usually slow during the week and busy on the weekends. An accounting and bookkeeping firms are monthly examples. They are busiest at the end or beginning of the month closing out the books for their clients. Yearly clients are car dealerships who are busiest in the summer months.
The important point to remember is financial up and downs are inevitable and can be easily predicted. Even on a national scale, we can predict these financial problems. Dating back to the mid 1700’s, the United States has experienced a recession almost every decade. It almost always happens in the last two years before, first two years after or straddling the decade. If we can predict our down times, why don’t we prepare financially for them? The last recession that started in December 2007 (even though most analysts incorrectly use the October 2008 crash date), and forced the closing of the closing of almost 200,000 businesses. This is huge. So why did so many long time businesses close? The answer is simple…they could not whether the financial storm.
It’s easy to spend the money when it comes in. Businesses that are on a daily, weekly or monthly cycle are the biggest portion of the businesses that closed. When times are good, you have got to put away money, but most owners buy new things they don’t need for their homes and businesses. The construction industry is a prime example. In 2005 when the economy was good and home sales and building was booming, contractors and construction made a lot of money. They might have needed a new truck for the business, but instead of buying a basic truck with the essentials for $25,000, they bought $60,000 loaded trucks with leather, sunroofs and the works. The business didn’t need all that equipment in a truck, but they had money, so they spent it. 2 or 3 years later, they were regretting these extravagant purchases.
The last point is that you need a credit line for the business. Not to use for normal expenses and to get through payroll, but rather for the once in a lifetime opportunities that come up in your business. Most successful, multi-million dollar companies can cite one opportunity that vaulted their business to the next level. That one project that, if you have enough available cash, you give you the opportunity to join the financial elite.
So how much cash cushion do you need to operate successfully during the economic storms? Obviously, it’s different for every business. A good start is to determine your fixed and semi-fixed expenses for year or two and use that as a benchmark for you cash reserve. Don’t worry about your variable expenses because you only incur those when you are doing businesses so they do not have as large of an effect as the fixed. Use the last big recession as your reminder that any business can close due to lack of cash. Remember, those who cannot remember the past are condemned to repeat it.
Written By Ameen Walker