There is a common misconception in the world of entrepreneurship that businesses fail because they simply aren’t generating enough cash.
While there is undeniable truth in that statement, it doesn’t tell the whole story. You see, many businesses end up overcoming some very difficult barriers—finding product-market fit, building a customer base, separating themselves from the competition—only to end up going broke. Not because they can’t seem to generate new customers, or because their product or service isn’t compelling, but because their monthly expenses end up exceeding their cash flow and/or cash on hand.
Put more simply: even if the company is growing rapidly, and generating a ton of revenue, money coming in doesn’t cover the money going out (for payroll, a building lease, etc.).
For example, let’s say a small business is generating $10,000 per month.
In order for the business to function, it needs to pay $2,000 in rent each month, $5,000 to salaried employees, $1,000 to a couple of contractors, and another $1,000 for a variety of software platforms, accounting tools, etc.
On paper, this business appears to be healthy and profitable. Each month, $10,000 comes in, and $7,000 goes out (to employees, vendors, etc.), leaving the owners with $3,000 net profit.
There’s just one problem.
The $10,000 the business is generating each month comes from two clients, each paying $5,000 per month retainers. One of those clients pays on time every month. The other is frequently late—sometimes more than a month late.
All of a sudden, in one single month, things can start to look pretty shaky for this small business. Depending on how much “cash on hand” they have is going to dictate how long they can survive if this late client decides to take 30 days to pay their invoice. And if the small business is brand new, then in the span of a single month it can go from healthy and profitable to dead.
Because $10,000 is going to go out the door no matter what, and only one client paid their invoice on time—leaving the company with negative $5,000 cash that month.
This example is why 82% of small businesses fail because of cash flow mismanagement.
First-time founders and entrepreneurs will very frequently think their business is healthy and profitable (and on paper, “it is”), only to quickly realize their cash situation is far from stable.
This usually happens when a growing startup begins to make decisions based on cash they think they are receiving or expect to receive soon—opposed to the cash they are guaranteed to have and the amount of cash already on hand. It ends up being a very confusing picture for the founder(s) to make sense of, because the company’s top-line revenue is trending up and to the right, meanwhile the company’s cash on hand is dangerously close to its monthly expenses.
To solve this problem, you need accurate cash projections.
You need a dashboard for your business that shows exactly how much money is coming in and going out—highlighting which areas of the business you should be watching closely (like automatic payments to vendors, or customers who frequently pay late). Our financial forecasting tool, PlaceCPM, allows businesses to do everything from budgeting and modeling to expense consolidation, reporting, and more, all natively built on the Salesforce platform.
In general, accurate cash projections allow you to have a better sense of what’s actually happening (and going to happen) within your business. The problem with standard accounting practices is they don’t take into account the unexpected realities of running a business.
But categorized spending, benchmarking and budgeting, and real-time analytics showing you the various risk profiles of your business can help you avoid the trap 82% of other businesses fall into.
If you would like a free trial or guided demo of PlaceCPM, you can get started today!
(If your business does not use Salesforce, PlaceCPM+ is the version for you.)