STARTING AND RUNNING A BUSINESS with THE COACH in your corner.

Cash Flow Plan

Avoiding business failure

Often knowing what not to do is equally important to knowing what to do. On the topic of business, failure often occurs for just a few easily identifiable reasons which is actually good news because knowing these reasons makes them preventable.

Undercapitalization of a business from the beginning is the most common. Most people whose business that failed for this reason either underestimated the time it would take to get the business entrenched in its marketplace and become competitive and to bring it to the point where it is profitable or they underestimated expenses or gambled that certain expenses wouldn’t occur. Either way, time and money should never be underestimated and business plan should always allow for contingencies.

Small businesses that achieve a certain level of success and then become complacent is another preventable reason for failure. This happens frequently when a start-up that has had great success and has been running for a number of years becomes falsely confident thinking that everything is going so well that they don’t have to try as hard as they did at the beginning. The opportunity is then there, for a competitor to do the very things that the first business did before the complacency lead to trouble.

Too much attention to the wrong details. You might think that attention to detail couldn’t hurt but too much attention to detail that doesn’t matter certainly can. An entrepreneur has to understand the priorities of the business and the things that lead to its important successes as opposed to the things that, while you might fuss over them and that might satisfy you, really have very little to do with the success of the business.

Too little attention to important things is the fourth reason for business failure. The cash flow of a business, the sales opportunities of a business and the way a business’s staff function are areas that require considerable attention. Therefore, one has to be sure in a business that there is the right amount of attention to the right details.

Accumulation of debt. A business very often needs to incur some debt to get started and as it becomes credit worthy and accumulates the opportunities to expand, it accepts terms from suppliers and such so that the business can grow. Sometimes, while this debt is accumulating, there is a cycle downward in the business environment and suddenly the debt cannot be sustained. Interest rates cycles also occur and while the accumulation of debt at two percent may have worked out, it is quite another case when interest rates hit eight or ten percent and that debt begins to cripple the business.

Another significant pitfall for a start-up business to avoid is confusing cash flow with profit. Simply defined, the money coming in and going out is the cash flow while the profit is the money that is left after the expenses are paid from the sale proceeds. With good supplier terms and other factors like cash that comes in before its expenses are due, a bank account can swell fairly quickly. An owner might look at that money in the bank and think the business can afford to take on obligations without a proper cash flow understanding. A good cash flow projection done by an accountant or by somebody knowledgeable in the business can show an owner in advance how the expenses are going to total and where the incomes are going to vary. At a certain point when the expenses exceed the cash available, the business will have a problem if the early positive cash flow was spent. Confusing positive cash flow with the actual profit of a business is another very common way for businesses to run into trouble and fail.

For more information on pitfalls to avoid, visit www.startingabusinesscoach.com

 

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