Cash is to a business what oxygen is to a person. A business can’t “breathe” without it. 80% of businesses fail within the first 5 years in business and the number one reason is a lack of cash (capital). But the lack of capital is not the cause. Many businesses need sufficient cash to figure out their marketing, management, and model during startup. If they don’t figure it out in time, they simply run out of cash.
Business owners that have figured out the three M’s (model, marketing, and management), and are in growth mode, realize that growth always requires cash. That’s because cash flow decreases while expenses increase. To create growth, expenses occur first and revenue hopefully comes after. Most business owners don’t realize there’s a timing difference between when increased expenses and increased revenue occur. That’s why a line of credit can be so important to bridge the gap in those timing differences.
I’ve worked with over a hundred professional services firms in my career. All of them love to bill work, but often don’t collect that work with the same passion. Let’s face it- none of us like to make collections or send out late notices.
I have a client that had a great year in revenue and collections this past year. They ended the year with about 36 days sales in accounts receivable. But in January, they had 30% revenue growth over last year’s pace and collections efforts slowed. In 60 days, this firm found themselves in a position that receivables have increased over $800,000 and have about 86 days of sales in receivables. So in addition to growth, businesses can also be suffocating for cash if the firm allows collections to slow down.
I have another client who was able to address this cash flow issue by changing their revenue model to getting a 50% deposit upfront for the product they deliver. This effectively cut their carrying level of receivables in half (their clients were paying net 30) and increased their cash balance by that amount.
Studies show that the number one issue CEOs and business owner lose sleep over is cash flow or the lack of it. I have one client that calls their line of credit “sleep insurance”. Cash flow problems don’t go away by themselves. It requires management to consistently monitor cash and receivables balances. Don’t put your head in the sand hoping this issue will go away. Give yourself and your business the ability to breathe easier by taking action to improve cash flow.