Does profitability prevent small business failure?
As referred to in my previous post, business owners have many different hats to wear to operate a business.
One hat, that is extremely important to wear, is the financial management hat. To have proper coordination within your business, requires, a focus on the financial position of the business. Your accountant is a great asset in this area as they can guide you and provide you with valuable advice and strategies to improve the business’ financial position.
According to Small Business Loans Australia, Small Businesses in Australia account for 32% of the Australian Gross Domestic Product, however, alarmingly 60% of businesses fail in the first three years. Of those that fail 50% are profitable (Inline Partners).
Having a profitable business alone does not equal success as other factors come into play, cashflow management is one of them. Cashflow is the lifeblood of any business. Cashflow is the amount of money coming into and out of your business. If a client is late paying, or, does not pay and the business has insufficient cash reserves then the business must look to other means of finance to pay suppliers and other creditors. This may include obtaining a line of credit/overdraft which is an additional cost for the business.
Government regulation also creates hurdles for businesses, reinforcing the need for businesses to have a coordinated set of business operations, strategies, processes and systems. An example of this is in the construction industry in Queensland where the QBCC regulates how much and when businesses can invoice their client. This becomes a juggling act for business owners between ordering materials for the work to be undertaken, sending invoices for work completed and paying suppliers for those materials within their trading terms and meeting other obligations of the business.
These are some firsts steps to take to have positive cashflow within your business:
- monitoring your account receivables;
- invoicing work in progress regularly;
- implementing debt recovery procedures;
- maintaining a healthy cash reserve; and
- monitoring your expenditure relative to your income.
Implementing strategies to maintain a positive cashflow is a step towards coordinating your business for success.
