Why Cash Flow is the #1 Reason Businesses Fail

October 7, 2015 Monique Morden

How do you feel when a devastating event can be prevented, but isn’t?

How do you feel when there’s a clear solution, but no one is willing to solve the problem?

How do you feel when something very simple could prevent a problem, but it’s never implemented?

To me, these kinds of occurrences seem utterly ridiculous and maddening. And that’s exactly how I feel about cash flow predictions.

Cash Flow is the #1 Reason Businesses Fail

The inability to understand the timing of money coming in and money going out often takes businesses by surprise and may instantly sink them.

Now you may be thinking this is because they just didn’t have a good business. But you would be wrong.

Sure, there are some bad ideas out there that will just never make it, but more often than not, fast-growing businesses are the ones that get caught off guard. The expenses needed to fuel their growth can outpace them as revenues increase.

Cash flow problems can happen to anyone

There is a recent, and very public, example of how cash flow can trip you up.

Zirtual is a very successful virtual assistant service based out of San Francisco. They were adding clients and staff at an amazing pace and growing exponentially.

They were the darling of the Valley.

But a very simple thing took them by surprise and tripped them up - three payroll periods in one month.

Zirtual paid their staff every two weeks. Usually, that means two pay periods per month but, occasionally, there will be a month with three pay periods. 

If you are operating close to the wire, this could mean disaster. Luckily, an angel investor came in to save them from bankruptcy.

I have a huge amount of empathy for the CEO of Zirtual. As a CEO, you are running a mile a minute, juggling many balls and prioritizing as best you can. Without tools to look into the future, it can be hard to see something like this coming.

Why don’t more businesses do cash flow projections?

Sitting in front of an excel spreadsheet isn’t very appealing.

It takes time. It needs to be regularly updated. It’s repetitive. It’s complicated. It’s a pain.

So, business owners, quite rightly, focus on selling, servicing, and managing the million other things on their plate. Beyond being time-crunched, business owners don’t always have the expertise required to put together a cash flow forecast.

Rocket science isn’t so bad when you are a rocket scientist, and cash flow projections aren’t hard when you’re an accountant.

But for a business owner, cash flow forecasting can be intimidating and complicated.

Of course, there is the option to have your accountant do your cash flow projections. But that costs money and it takes time to review and digest, which ends up costing even more money.

That’s where things get risky because sometimes it just seems easier to do the mental math yourself or use your gut.

Digging into the details

For the few companies that are handling their own cash flow - usually somewhat larger small businesses (an oxymoron, I know) - they like knowing the details. This is a really interesting and important point.

Some companies have commented that the process of copying and pasting the information from their accounting package into excel was learning in itself. They wanted to know the details and the numbers.

The process itself was informative, which makes sense. Having a black box approach to projecting cash flow wasn’t good enough.

Business owners need the option of digging into the details, so they understand all aspects of the business.

Cash flow problems are easy to fix

Sure, this feels like a pitch, but Mentio is democratizing cash flow predictions so that anyone can get them.

We know past behaviour is the best predictor of future behaviour. All of your past financials can be used to predict 30, 60 and 90 days out to act as an early warning system for what your business could be facing in the near term.

We push insights and actions to help with the levers related to cash flow. Levers like sales, expenses and financing.

Just do it

The bottom-line? The importance of cash flow management is imperative, so do your cash flow projections!

Studies show that of the businesses doing monthly cash flow projections, 80% will survive compared to only 36% that do it annually. Think about what that means for businesses that never calculate cash flow projections.

Whether you use a tool like Mentio to help you do it or go the manual route, it doesn’t matter - making cash flow projections will increase your chances of success.

It’s a no-brainer.

 Get the entire story in our #smallbiz_expert Twitter interview w/ Mentio!

This blog post is brought to you by Monique Morden the CEO and Co-founder of Mentio, your mobile business mentor. Mentio provides automated cash flow projections and insights to optimize your business. Check out Wagepoint's marketplace to get access to Mentio, free for life - also a no-brainer in our opinion!

About the Author

Monique Morden

Monique is the CEO and Co-founder of Mentio. The startup is currently part of the Techstars Seattle program which will accelerate them into the US market. Monique has three teenage daughters and a very supportive husband. They are all held together by Koda their Lab/Retriever puppy. Monique is a self confessed ski addict who regularly seeks help throughout the winter at the top of Whistler mountain.

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