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Expert Answers to Biz Questions

Listen in! Pick up some expert advice to a reader's question that we selected from CyberSchmooz.

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Poor Financial Management Fuels Most Small Business Failure

 

As many as 99% of American companies are small businesses, and depending on the industry about 50% fold within the first five years, most often because of poor financial management. That’s an intimidating reality for owners to face, but it’s not inevitable. With proper planning, you can minimize your company’s vulnerability, while being equipped with proven remedies if your finances do become tenuous.

 

Problems With Planning

While countless factors contribute to a business’s success, the most common issues that companies face typically stem from poor planning. Business owners who lack a sufficient advance plan (including budgets, cash flow projections, and marketing and staffing plans) are more likely to struggle once they launch. As such, any time these companies hit a snag, they’re forced to start from a blank slate. 

 

If you’ve launched a business without building out a complete plan for the first several years, including contingency plans, it’s not too late to backtrack. Ideally in consultation with an experienced finance and marketing professional, you can develop the plans you need to weather the storms. 

 

Lack Of Liquidity

Another common issue that small businesses encounter during their early years is a lack of liquidity. Liquidity is defined as the ability to quickly convert assets into cash without loss, typically to pay bills. Too often, small businesses don’t have access to enough cash, but when they attempt to access cash, they’re often forced to sell some kind of asset at a loss. The best way to ensure liquidity is by collecting on receivables – but if that was working well, your company wouldn’t have a liquidity problem to begin with.

 

Many small businesses struggle with cash flow, either because they’re not making enough sales or because clients consider them a low priority and don’t pay them for their services, both of which present a problem. The latter, however, can be solved by turning to a collection agency. A collection agency acts as a go-between, seeking payment of debts on your behalf. This can help resolve your cash flow problems and minimize your loss on any debts. Clients also tend to take notices from collection agencies more seriously than they do repeat invoices from small businesses.

 

Consider Clients Carefully

How much your business knows about its clients will vary widely depending on your industry. That being said, it’s worth doing your due diligence whenever possible. This can help you filter out clients who are more likely to cause problems than to help you build your business. Besides turning down clients with poor credit, as you may not always have access to that information, you can also request full or partial payment up front, provide discounts for early payment, or add an interest charge to late invoices. 

 

Cash flow problems aren’t the only reason that businesses struggle; many also face issues related to lack of demand or being situated in an unsuitable location. These issues, however, can often be resolved if your business has a proper business plan, sufficient liquidity, and loyal clients. In other words, if you have the right elements underpinning your business concept – the same elements that provide financial stability – you’ll be prepared for anything. Businesses rise and fall with their cash flow, so plan accordingly.

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