Here are five reasons why cash flow is vital for an entrepreneur.
1. Because Cash Flow Statistics Suggest That Most Businesses Fail Because of Cash Flow Problems
9 out of 10 startups fail. Multiple sources, including Investopedia and Startup Genome report, point towards this.
Further, as per the National Business Capital and Services “2019 Small Business Failure Rate: Startup Statistics by Industry” report, as of 2019, startup failure rates were around 90%. Per this report, 21.5% of startups fail in the first year, 30% in the second year, 50% in the fifth year, and 70% in their 10th year.
Yes, it is that tough to survive in the business. Of all the businesses that fail, 82% fail due to cash flow problems.
Many businesses collapse because they do not have a cash flow cushion. Even big billion-dollar companies with huge assets and customer base experience this.
Do you recognize these names? Gold’s Gym, Virgin Australia, Debenhams, DW Sports. All have filed for bankruptcy or in administration in the not too distant past.
All of them have a massive presence. They sell a lot. They have existed for a long time.
Still, they came to a point where they had to file for bankruptcy.
Because they did not have enough cash flow as a reserve to support the business when there were no sales due to the pandemic.
It came as a shock to them, like every other business owner.
But a resilient business considers the worst when building its cash flow reserves. As a result, they manage to survive even in unfavorable situations like the pandemic.
2. Because Cash Flow Is Fuel for Your Business
Cash flow is the energy reserve that helps you survive when running low on money energy in the business ultramarathon.
Cash flow is like petrol if you are driving your car.
Cash flow helps you survive when you cannot get the money from outside, like in times of crisis or when your sales are slower than expected.
It’s your stamina when you are playing any sport.
If you have the skill but no stamina, your chances of winning the game will be limited.
Similarly, in business, you may be brilliant, but until you have ample cash flow, you can’t deploy your smartness and skills to run, grow and make a profit in your business.
Maybe you’ve identified a gap in the market you want to address or solve a problem that millions are facing. To do anything like this, you need cash. Bigger the vision and mission, the bigger the cash flow needs.
3. Because Cash Flow Is One of the Most Important Metrics in Any Business
Your social media followers, connections, google rankings, public speaking skills, or podcast downloads don’t matter when you don’t have the cash flow.
If someone has all these but no cash flow, they will be what I call social media-rich, cash flow poor.
When times are tough, the cash flow reserve will get you out of the sticky situation.
So, take control of your cash flow. Don’t assume it’s the by-product of sales. If it were, lots of businesses with millions and billions in sales would not have gone bust.
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4. Because Business Is a Marathon, Not a Sprint
It takes more time and cash than expected before the business starts generating a profit.
This means you need more cash flow than you initially budgeted. So, if you don’t have an alternative source of cash inflow during this phase of establishing the business, your business can come to a halt.
I experienced this when I wanted to launch this cash flow hub. It took longer than I expected, and because it took so much energy and focus, I couldn’t put my energy into other cash-generating activities.
Furthermore, an entrepreneur is in the business for ten years, like a marathon, not a sprint of one year.
And, during this long journey of entrepreneurship, every business, at some point, goes through a cash flow rollercoaster. One month there’s a bump in cash flow, and the next month, the founder is worried about whether he has enough cash to pay the bills on time.
Cash flow problems are not unique to you. Almost every business owner faces them at some point in their business journey. So when you experience a cash flow rollercoaster, know that you are not alone. When you experience cash flow problems, don’t let them become too big.
5. Because Cash Is the King
Cash is king is a way of saying that nothing is more significant in the business than cash.
We can’t pay a supplier using turnover or profit. We need cash for it.
We also need cash to make investments in the business.
Observe this discussion between a founder and his team to understand it better.
Founder: How much money did we make this quarter?
Team member 1: We made £100k revenue and £25k profit.
Founder: Ok, great, let’s invest £20k in marketing. £5k to build funnels, and £5k each for running ads on Facebook, Google, and YouTube.
Team member 2: That’s awesome. Let’s do it.
Team member 1: Wait, we don’t have £20k cash in the bank even though we made a profit of £25k.
Founder: What? How come?
Team member 1: Some of our customers pay in installments, and some cash is not collected yet as it is tied up in debtors. So we don’t have £20k, let alone £25k. We can’t spend profit. We need cash.
This conversation helps us realize how cash is king.
When it matters most, cash is the only thing that keeps your business going.
I remember how one of my clients, who has been in business for eight years, was doing £4.4m in revenue a year. Suddenly there was a cash crunch, and he sent me an email very early in the morning saying, “Where is my cash Shishir? It’s all gone. What is my next move?”
We worked on his business to fix his causes of cash flow problems. This work prompted me to write this beginner’s guide on cash flow management.
Building a solid cash flow foundation is crucial if you want to go further in business.
To do that, understand the importance of cash flow in your business and believe that it is the most critical metric for any business.