What is the number one reason small businesses fail?
Cashflow problems are a common cause of stress for businesses. Of the businesses that fail, 82% of them fail because of cashflow shortages.
The knee-jerk reaction to resolve cashflow issues is often to sell more. However, that is not always a good solution.
There are several factors to consider before leaping to the “sell, sell, sell!” mindset to reverse a cash flow problem.
Here are a few suggestions:
1. Categorize your spending.
Your first step should be to know exactly what you’re spending and where you’re spending it. Categorize your expenses into General and Administrative, Sales & Marketing, Operations, and COGS, and see if anything stands out. Note the percentage spends for each category, and analyze whether the cash distribution makes sense.
You should have a clear picture of how other businesses are spending and use those benchmarks to spend similarly. Consider businesses within your industry as well as businesses within your company’s lifecycle stage. Remember, you don’t want to spend more cash than you have, so regardless of benchmarks derived from other companies, adjust accordingly depending on your available cash. If you are in a mastermind group, this is a great topic for discussion.
3. Micromanage your spending.
You’ve probably heard the saying “It takes money to make money,” but this common belief can cause new entrepreneurs to fall prey to gross overspending, especially during their first few months of business. While it does take money to make money, not all expenses are created equal. Remember that every dollar you spend is detracting from your profit margin, so especially during the early stages, it is important to consider the cost-benefit of every single expense.
(Attribution for some of this post: score.org)
Anna Hill is the founder of Accounting We Will Go, a firm that provides accounting and bookkeeping services along with training for Amazon sellers.