Why do Businesses Fail? Part IX


Published: February 17, 2020

Courtesy of keap.com

Being an entrepreneur is a continuous investment into one’s business; it never stops. With that said, there must be some systematic investment methodology, a vehicle that the entrepreneur must follow through consistently to handle this equity investment over time. The entrepreneur, through planning, uses savings and other investments to parlay into the enterprise. Hence, the spouse or significant other’s income from their career or job back into the business, which, if appropriately used, is a tax write-off for the company. Tax planning is paramount in any business planning and must be adhered to by the entrepreneur.

For the service industry’s, the overhead reduced so profits can roll back into the enterprise and continuously invested back into the company.  It is known in the early day’s profits are hard to come by due to the balance of expenses and income, and the difference between the two would be the profits. Thus, it is the reason why continuous investment from the entrepreneur or shareholders. I like to use an S Corporation for tax planning and purposes and, over the years, found it to be favorable as a vehicle to reinvest back into the business operations with tax benefits.

The Lack of Capital

A company’s working capital in that of a small business is its current assets minus its liabilities. These assets are are the existing resources that a firm uses to convert into cash within a fiscal year. The firm’s current liabilities are the debt that must be paid within a year and is a measurement of efficiency within the organization on how it spends its short-term debt and its overall financial health to the organization. Thus, the need for entrepreneurs to maintain a sufficient positive working capital posture to pay its operating costs successfully, such as its payroll and other day-to-day financial concerns.

The Attraction of Investors

Moreover, the small business that lacks sufficient working capital will find it hard to attract investors or lenders when they need it. Working capital shows external forces that the firm can pay back loans and earn a sufficient profit and able to allow the investor to make a return on their investment. Most creditors require businesses to pledge assets as collateral for the loan, and if no collateral, it could be hard for the firm to acquire the loan and the company to be a risk to the lending establishment. Thus, this inability to attract lenders or investors could affect the company’s ability to purchase the necessary needed resources to operate its day-to-day business operation.

As a Small Business Consultancy, we have partnered with other entrepreneurial lenders that lend to entrepreneurs without collateral up to $750,000 unsecured loan without tax returns, business plans, NO UPFRONT FEES, with 3-months of bank statements. Approval of the loan within 24-hours, and a 3-day funding process. As one who holds a Doctorate of Business Administration in Entrepreneurship and Business Management, I intend to provide a solution to the lack of sufficient financing for entrepreneurs. Therefore, in doing will sustain the operation of entrepreneurial organizations. Working Capital consists of a business, salaries, needed equipment for the maintenance of the day-to-day operation of the entity, and without it makes it hard to operate and make a profit.

Improving the Working Capital

When a small business is struggling with cash flow issues, it must take steps to alleviate the problem. Thus, one way to deal with this issue is internal managerial shifts in financial areas that will boost receiving cash payments and tightening the issuing of credit to your customers. Revising one’s account receivable programs that encourage customers to pay their invoices early, the use of credit card payments debited each month when due. Discouragement of mailing to that of using the credit/debit cards for payment now over that of mailing and waiting several days for payments to post. Other ways of increasing cash-flow are to sell long-term assets for cash or increasing organic sales to offset the cash flow issue.

Positive cash flow will allow the organization to grow. When a company is trying to build it, it often purchases other assets that needed in this growth process or that of services that can quicken the process and pace to a larger scale. This lack of capital is a hindrance to the growth of the enterprise to expand, and if cash flow continued could find it losing customers to its competitors.

Cash Flow Bits of Advice

Now other than using external sources such as borrowing, I will share with you some internal resources that can apply to off-see one’s cash flow problems that can boost ones working capital internally within the organization. These methods will save you from borrowing and, when done organically, will make one wiser in the future if the said issue happens again. 1) Audit your organization’s finances: research outgoing and incoming revenues to see where the savings or improvements made can occur. Upselling complementary products or services alongside one’s primary offering could have an impact on revenue upswing.

2) Seek to improve one’s profit margins: auditing prices could reveal some room for maneuvering and that negotiating better deals with one’s suppliers could help improve profit margins. 3) Cutting Costs: reducing cost and saving through cutting business overhead or other administrative costs can increase cash flow and reduce the strain on the overall budgetary issues within the organization, and allows the business to save money every month. 4) Control Credit: As a small business owner, you need to know how much money owed at any given point. Ordering the collection of money owed to the business will help to maintain a positive cash flow within the company. The setting up of computerized accounting software that will notify when accounts are due and prevent late payment fees, which will reduce the overall collection process.

5) Forecasting Cash Flow: small business regular usage of cash flow forecast will let one know where the cash needed in the upcoming months in one’s enterprise. Money that otherwise derailed can now record and allowing the entrepreneur to make arrangements for future borrowing or to take other appropriate actions in planning needed capital for the business aforehand. Cash flow forecast is required tools that often underused within a company; however, it can dictate financial issues ahead of time. They are needed to be updated regularly with the actual figures compared to the projected forecast figures, which will defend off cash flow problems.

6) Set up an Accounting System: the small business owner should know at all times where he/she is financially in the business. Who is owed and when vendors are due, and stay away from late payment. For this, too can erode needed cash flow used within the business. Management reports of daily cash flow statements and the business position cash flow can help the organization stay away from insolvency.

7) Alternative Funding Options: The practices that have been mention in this works can boost one’s cash flow position; however, the question is this enough every month to handle one’s cash flow position in the business or is debt a better financial instrument for some capital project that is needed to take advantage of some income opportunity to boost working capital? Either way, these tools should be used for management to have a better grip on the financial solvency of one’s business financial needs.

Conclusion

In conclusion, cash is king. Thus, for management to know at all time where their money is, is vital to the financial position of any organization. Cash pay’s debts within the business and having enough cash on hand to pay vendors and handle the day-to-day operation is one of the main reasons why businesses fail due to the lack of cash flow. 82% of companies fail due to a lack of cash flow. So, knowing this management should focus on financial tools that will alarm them when cash is getting low, and use various methods to assure some money is always prevalent and on hand, for this is the sustainability of the firm.

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