That’s right, even a business that is profitable and growing can sometimes go bankrupt. People who have never run a business have a hard time understanding this. But much of the time it comes down to a simple problem, not having enough cash around at the time that you need it.
Accountants and business people know this problem well, it’s known as a cash flow problem and can be a big problem for companies of any size. Cash problems can arise from many causes. Suppose your company makes a huge sale and you can potentially make a huge profit. Normally a huge sale would be a cause to celebrate, but what if your company doesn’t have the money to buy the materials needed to fill the order on time? There are also other costs like extra equipment or hiring more people that you’ll need to complete the order. Not having enough cash could lead to ruin.
Unfortunately, cash flow is something that most small business owners don’t think about. But that can be a big mistake. Recent data compiled by the research firm CB Insights found that 29 percent of startups fail because of a cash crisis.
But the news doesn’t have to be all bad, there are some ways of avoiding cash problems for startups and small businesses.
The most obvious way to avoid a cash problem is to not get in over your head. For a startup that means choosing a business with a lower overhead. If you don’t have access to a lot of funds this is a good way to go.
Do some research and find out what to expect your cash needs will be before you open your doors. Try to line up some investors or secure credit to help you stay open until your revenue starts coming in the door. Business credit cards are a good way to have a cash reserve available when you need it.
Finally, there are also cash management services that can insure you have good cash flow all the time.