Financial management for success
At the end of the 20th century, only 10 years ago, research showed that half of small businesses failed in the first five years. Recently, similar research showed the mortality rate for small businesses had increased by 20% to half failing in the first four years. Neither of these studies offered a reason for such a high failure rate, nor the acceleration of failures.
Of course, there are many reasons why a business fails. But the predominant contributor to small business carnage is failure to understand the financial fundamentals, more specifically, not understanding cash flow or how to capitalize growth.
So, if you don’t want to become part of a gruesome statistic, take the following suggestions seriously:
- Produce regular (at least quarterly) and accurate financial statements (balance sheet and profit-and-loss).
- Hire an accounting firm to help you. Too expensive? How expensive is failure?
- Purchase and use one of the financial management software programs. Ask your CPA for a recommendation.
- Track sales-to-expense ratios each month in order to know when to adjust spending.
- Understand how to monitor inventory levels with regard to projected sales, receivables and cash.
- Learn how to calculate Accounts Receivable days and Accounts Payable days, and understand their relationship to each other, plus the impact of that relationship on cash flow and working capital. If your company is experiencing rapid growth, disregard this fundamental at your peril.
- Develop a long-term capitalization strategy that blends retained earnings with both short and long-term bank debt.
- Learn how to identify the top three financial indicators that point to impediments to profitability.
- Acquire a complete understanding of the difference between cash and accounting, and learn how to build and use a 12-month cash flow projection.
If you aren’t practicing these fundamentals, the cold sweat popping out on your forehead right now should motivate you to kick your financial education into high gear. If you will pay attention to these financial fundamentals – some you can delegate and some you can’t – you will significantly improve your chances of staying out of the small business obituaries.
You don’t have to become an accountant to be a successful small business owner, but if you don’t manage with your business’ financial information, you will fail.
Write this on a rock ... Success requires you to manage with financial fundamentals.
Jim Blasingame is creator and host of the Small Business Advocate Show.
Copyright 2010, author retains ownership. All Rights Reserved.
