Cash Flow for Small Business

Today we are going to talk about small businesses. What they are, why they fail, and how can they find success.

So what is a small business?

A small business as defined by the Small Business Administration is a privately owned enterprise with 500 or less employees. That is a pretty broad definition, so let’s break it down to get a picture of what MOST small businesses are.

  • 81% of small business have no employees.
  • 86.6% of non-employer firms are sole proprietors or single member LLCs (SMLLC)
  • 14% of employer firms are sole proprietors or single member LLCs (SMLLC) not taxed as S-corporations
  • More than 50% of small employer firms are S-corporations

Small businesses comprise:

  • 99.9% of all firms
  • 99.7% of all firms with paid employees
  • Almost half of private sector employees and GDP
  • And more than a third of private sector payroll and receipts

 

Before we move to the next topic, it is important to talk about how the pandemic changed the small business landscape.

The Small Business & Entrepreneurship Council estimates 29.7% of small businesses closed in 2020, up from an average of 7-9% yearly.

However, 4.4 million new businesses were started in 2020 – the highest on record to that point.

In 2021, that grew to 5.4 million.

And in the first 3 quarters of 2022 there have been 3.8 million small businesses started.

With all of that great news, what are we here to talk about?

One thing we hear often is how many small businesses fail. So let’s take a look at what the Small Business Administration reports on this front, which we will visit from the consistent data we had prior to the tumult of 2020, 2021, and 2022

Pre-pandemic, 32.4% of businesses failed in first two years, 51.1% failed by year 5, 63.4% by year 10, and only a quarter of all small businesses made it to year 15.

But there is some good news, according to SCORE, about 82% of the small businesses that do fail, do so because of cash flow problems. That means that a strong financial foundation can increase the likelihood of a business falling in that 25% long term success story!

So what is cash flow and why does it have such a strong impact on business success? In the simplest terms, cash flow is the net amount of cash and cash equivalents that transfer in and out of a business. The types of cash flows in a business are:

  • Operations which are all transactions from all operational business activities
  • Investing which includes capital expenditures (used to acquire, upgrade, or maintain physical assets like property, plants, buildings, technology, or equipment)
  • Financing which is the measurement of the cash flowing between the business and its owners (equity) and creditors (debt)

Some of the easiest ways to successfully manage cash flows are:

  • Build a budget – by building an operating budget and sticking to it, businesses are able to finance their own activities through profits. With MK Beyer & Associates, this is an ongoing process we work through with new clients with a goal to get them to operating budget and then help increase profits.
  • Protect your credit – pay your bills on time, keep your net terms with vendors as low as possible, and do not delay payments. Follow the saying, “you can only get a loan when it looks like you don’t need one.” Watch cash flows so you can borrow money before you need it.
  • Manage inventory well – inventory is a business asset – manage it as if it was cold, hard cash, because that is what it essentially is.
  • Have a savings reserve – yes, this is hard and not always possible early on in a business, but having at least 3 months of expenses in savings can mean the difference between staying in business or closing up shop. Many of the businesses that failed in the pandemic did not have the reserve available to allow them time to pivot.

Many small businesses also seek financing to expand and strengthen financial health and create a reserve. And when you ask, ask for twice what you need! 75% of all small business applicants receive some of what they asked (less than 50% receive all of the financing asked for).

And do you know what a business needs to secure financing? Complete and accurate financial records that are created and maintained well and regularly by….

A great bookkeeper! Look for professionals offering proactive guidance and with a track record of success with clients. This will be a long term relationship, so personality fit is also very important.

And while all bookkeepers will help manage transactions, many do not focus on the additional aspects of business management that can affect cash flows.

As many of our clients are solopreneurs, small owner/operators, and partnerships looking to grow, MK Beyer & Associates helps our clients additionally by focusing on:

  • Tracking their time – this helps identify where they are working outside of income generating activities and determines when the cost/benefit reaches a point where it is time to bring on new employees or outsource activities to consultants or contractors
  • To think about the goals of their business – what is the biggest most exciting goal they can envision for the business? Is it realistic? If not, what would make it realistic? Do they want to stay an owner/operator or move into more of a CEO role? Do they want to sell the company at some point for profit or retirement? These goals help us guide them through the financial decisions they need to make to find success.
  • And to help them work through some of the more emotional aspects of the financial process that brought them to us in the first place. Many clients come to us after years of not taking action on the financial health of their business due anxiety, shame, or fear.

These are some of the common things we hear in consultations and from our clients.

“I just freeze every time I look at my finances.”

This may be due to lack of understanding, lack of time to really focus on the work, or total lack of any sort of system or process. Many people who do not have a competency for bookkeeping and accounting procrastinate the work, which also adds to this anxiety.

“I am so ashamed of how bad it has gotten.”

This is where anxiety leads. When the finances are left for too long, they become a mess and make it hard to run a business. We also see many people who feel stupid because the business owners they know all seem to have a handle on understanding business financials, but they just cannot “get it.”

And, if both of these are left too long, we get to fear.

“I haven’t filed taxes in three years and I am scared to start now.”

Or, “I know I filed my taxes wrong and I am scared to amend them.”

Or, “I feel like going back and fixing things will put me on the radar for an audit.”

But the biggest we hear, “I am afraid I will have to close my business because I don’t know if I am actually making any money.”

We help guide our clients out of these deep and painful places through organization, accuracy, and compassion. Removing these stresses frees them to focus on doing what they love and finding success. The best way to remove fear is to feel through it and take action – and we are here to help.

We are happy to talk to all small business owners to determine their needs and how we can help or who we can best refer them to for help.