Blaming business failure on cash flow issues is a superficial excuse. If you want better returns from your business, you need to look deeper. Depending on which research you read and which industries and countries are surveyed, small businesses around the world are highly unlikely to survive beyond 5 years. Some statistics show failures are as high as 90%, while others, like the US Bureau of Labor Statistics, shows 51.2% of start-ups fail within 5 years. (Visual Capitalist)
What can we learn to improve our chances of success as entrepreneurs? The most popular reason cited for failure – the top factor affecting over four-fifths of shut-downs – is cash flow problems. I find this, at best, superficial. At worst, this is misleading.
Of course, when our business cannot generate enough cash to cover expenses due each day or week, there is no other proximal reason for closing down. But closing down because of poor cash flow is not the actual cause of failure. Believing that we close down for this reason is like believing a job has a risk of delivering late because of a schedule risk. It’s a tautology. The schedule is where the risk shows up. What we need to identify is what caused schedule slippage. It’s the same in each business failure’s post-mortem.
In reality, companies fail for a combination of reasons. It helps to work backwards from the end result and analyse the events that led up to that result. Taking a systemic view of any operation, it should be plainly obvious that cash inflows are the result of various activities like a cash sale, a debtor settling her account, or a loan made to the business. On the other side, cash outflows follow an identical systemic principle of activities that cause the outflow, like paying creditors, labour, or servicing a loan.
It’s all about systems, the chains of events that lead to the cycle of cash flowing in and out of our business.
Of course, being an astute entrepreneur, I’m sure you have some form of budgeting and cash flow forecasting methods to help manage cash flow. Except, it’s not these visible things that catch us out. Many “activities” we do are invisible and a far more common undoing of many businesses. With all our cognitive biases, it’s easy, for example, to over-estimate our sales forecast and growth. It’s also easy to under-estimate how much marketing is needed to gain traction, affecting both the cost of marketing and how long those marketing costs are incurred, which reduce and delay the return on our marketing investment.
Ultimately, if it’s poor cash flow and a lack of cash that’s stopping you from paying yourself healthy dividends as a business owner, it’s time to look inside. Literally, inside yourself and your organisation.
The more we are aware of our personal and organisational culture, beliefs and biases, the less likely we’ll succumb to failure, especially that grossly superficial category of “poor cash flow”.