The 5 most common cash flow challenges for entrepreneurs

There are plenty of reasons why small and medium-sized businesses (SMEs) succeed in their respective marketplaces, but perhaps even more why they don’t. From developing products and services that their target clientele really doesn’t need, to strategic miscalculations, Canadian SMEs face a raft of obstacles to achieving business success.

There’s one challenge that can be even more daunting: managing cash flow

According to a 2014 survey of failed U.S. start-ups by New York-based business intelligence and data-analysis firm CB Insights, 29 per cent of respondents cited a lack of cash as the reason for their companies’ premature demise. Not having the right team in place and being out-maneuvered by competitors were the next two most common reasons.

While it’s an obvious point, running out of cash poses a major problem for any business, particularly in the start-up phase when client lists are thin, seed funding can be limited and assets are few. This begs the question: How can smart people with great ideas and, in many cases, impressive business resumes and experience not properly manage what should, at least in theory, be a relatively straightforward aspect of running a business? The answer is that managing cash flow isn’t nearly as simple as it seems. In fact, there are a host of reasons why it flummoxes even the most highly-skilled CEOs.

Here are five of the most common:

Not understanding cash flow basics—I’ve lost count of the number of business owners who have told me about the huge orders they have booked months down the road and the cash they have coming in to the business. But when we look at their books to compare liquid capital against ongoing expenses, the discussion inevitably shifts to how they plan to remain solvent in the interim. Most don’t have an answer.

Here’s what you need to remember: a business needs to have cash available to cover ongoing expenses or else it will run a deficit and into financial difficulty. Even being profitable is no guarantee that your company will remain a going concern. The good news is that many cash flow crunches are a limited-time challenge—and they’re often predictable.

Losing sight of revenue—Forecasting revenue is crucial. Strong leaders need to have the business acumen (or at the very least access to a good CFO or accountant) to help them predict future cash flows. Sure, your business might be generating $1 million a month in revenue today, but if the future wind-down of a key contract means that monthly revenue will dwindle to less than half with overhead of $500,000, then you can expect a major cash flow issue in the near future. While the issue can be managed, the challenge for most leaders is taking time away from filling orders and servicing clients to see the fiscal storm clouds on the horizon and steer clear before it’s too late.

Over-spending—“We need to buy a quality pickup truck”, “Staging this marketing event is crucial to our success”; “This office space is going to help define and build our brand.” We’ve heard every one of these statements from clients and while some can, indeed, be true, most of the time they’re a reflection of misplaced business priorities. That’s because over-spending on everything from pricey office space or furniture, to unnecessary business travel and even employee-friendly perks, can quickly upset a company’s financial stability. This isn’t just a start-up problem, either. We’ve seen veteran leaders in charge of decades-old businesses open the spending spigot only to find themselves in financial hot water soon after. Ironically, because they’re making money, they feel that lavish spending is suddenly a viable financial option. This is almost never the case.

Over-hiring—For a lot of CEOs, building a company means filling an office space or a facility such as a factory with great people. It’s an admirable goal. Who wouldn’t want to look out and see a workplace filled with happy, productive staffers? But in the rush to grow, many leaders will over-hire and over-pay to acquire top performers, some of whom they simply don’t need. This can be an even bigger problem when filling expensive senior-level positions—some of which might be superfluous in the first place— which tend to come with onerous contractual obligations or expensive termination costs that can eventually handicap a company’s financial well-being.

Failing to collect receivables—I wanted to save the best (or is it the worst?) point for last. Many organizations have a limited grasp on outstanding receivables—the money owed to them by customers—and an even poorer system for managing collections. Sometimes this is the result of dated or limited internal accounting processes. Other times it’s due to a lack of time to manage the tedious process of collecting outstanding debts. Whatever the case, the most important aspect of maintaining strong cash flow is to have cash flowing into the business. The only way that happens is if clients are paying their bills (hopefully on time).

In my next blog, I’ll provide financial management tactics to address each of these challenges.

Hartley Cohen, Partner