Pop Quiz: Which of these is the reason most small businesses fail?
- Healthcare costs
- Temporary slowdown in sales
- Raw materials interruptions
- Losing key employees
- None of the above
If you guessed “None of the above,” you are correct.
Rule Number One in business is:
“Never run out of cash or credit.”
I know; obvious, right? But hold on…
Even though it is obvious, because it is your biggest threat it needs your attention.
Without cash, it’s like you’re stuck in your car with an empty fuel tank, on a desert road, in 110-degree heat, with no water, with a dead cell phone and a slim chance of getting to the next town. Think buzzards circling.
This threat is one of the big three reasons people call us to be their outsourced CFOs.
Chief financial officers do many, many useful tasks, but the fundamental purpose of a CFO—ahead of everything else—is to make sure your business never runs out of cash or credit. If that ever happens, you don’t have a business anymore.
How do we make sure you never run out of cash or credit?
Firstly, we provide cash-flow forecasting. Your CFO gathers all of your sales data, all of your costs (direct and indirect), your orders, your debt service, your tax deposits, your payroll, and dozens of other data points. He or she then presents you with a two-week, six-week, and six-month cash-flow forecast, telling you how much cash is going to be in your fuel tanks—your bank accounts—in the near future.
Most of the time, it’s difficult to know for certain how many new orders you will receive, or how much your raw materials are going to cost to the penny. We use statistics to make informed assumptions and forecast quite accurately anyway.
Secondly, we track your real bank balances from week to week against our forecasts to see how close they were to the actual result. If we need to (because for example, we were too high or low by more than five percent), we adjust and rerun all the numbers.
Think of the power of having reliable cash-flow forecasting.
Many entrepreneurs run their businesses out of their checkbooks. “If there’s money in the account, we’re good,” they think. Except most business owners also know the feeling of waking up in the dead of night with a gasp: “Will I really be able to make payroll in two weeks? What happens if that big order I’m counting on falls through? What if that client doesn’t pay by the 30th as promised?”
It’s hard to get back to sleep with that on your mind.
With accurate cash-flow forecasting, it’s a lot easier to sleep through the night. You can see in advance what your account balances are going to be for weeks ahead, well over the horizon into next month and next quarter. That can give you a great feeling of confidence. Or it can tell you what you need to do to avoid running short.
Once you have solid cash-flow forecasting, what does your CFO do next?
Stay tuned. Next month: Installing new shock absorbers.
(Teaser: You need a credit line from a trustworthy bank to help grow your business.)
Another Pop Quiz: Do the fastest-growing startups have…
- positive cash flow,
- negative cash flow,
- lots and lots of cash flow, or
- very little cash flow?
It’s counterintuitive, but the answer is b). Growing businesses eat cash for breakfast, lunch, dinner, and midnight snack.
How can this be? Well…
We will talk about how you can have a wildly successful startup and still go out of business as a victim of your own success. Look for our next post: “How to Succeed Your Way to Business Failure (and what to do instead).”
In the meantime, feel free to contact me to discuss our outsourced CFO services for small businesses. We’ll help make sure your business never runs out of cash or credit.