Half of new businesses fail by year five, according to U.S. Chamber of Commerce data. The top cause of their failure? They run out of money.
Poor financial planning and cash flow management are the top killers of small businesses, and it’s not even close.
At the beginning of my management career, I was the top executive of a sixty-year-old organization. I inherited a bit of a financial mess when I started.
My first year we carried a balance on our line of credit from the previous year all year. We also maxed out the line of credit by the end of that first year. Because our business was seasonal in nature, we received revenue for the next fiscal year during the current one. We spent nearly all of that cash flow on the current year’s expenses.
But slowly and surely, we began to chip away at how these issues were managed. We overhauled our budgeting process, and we stuck to the budget, making tough choices that weren’t fun but held the line on good financial management. We invested in new financial supporter relationships. We deepened relationships with existing supporters. We got creative with service offerings and tightened up easy loose ends.
Gradually, we borrowed less on the line of credit until, after a few years, we no longer needed it.
Then we focused on cash flow issues and gradually spent less and less of next year’s revenue to pay for this year.
Eventually, during the last year I worked there, we borrowed nothing…from either our line of credit or our future selves.
All this hard work set the organization up to think proactively and strategically about its future. We were able to focus on lofty strategic goals and a long-term vision that could elevate the organization to the next level. With our plate cleared of significant financial hurdles, and the associated stress, the conversation changed to more important and strategic topics.
This is true for every business. Until you clean up and manage your finances with discipline, stress, anxiety, and struggle will be high. Focus on your finances, clean them up, and watch how the conversation shifts to more important topics.
And if you need help developing customized plans to clean up your finances and think about your long-term strategies, we can help.
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