Macro photo of tooth wheel mechanism with imprinted OPPORTUNITIES, THREATS concept words
According to a recent US Bank study, 82% of small business failures occur because of cash flow problems.
And the biggest danger is that cash flow issues can crop up extremely fast and destroy an otherwise thriving business in a matter of months.
Imagine some kind of disaster for which you can’t get (or don’t have) insurance. Like a flood, or an earthquake, or a cybercrime that wipes you out.
Without adequate emergency cash, most small businesses wither and die. The Institute for Business and Home Safety says that 26% of small businesses that shut down due to an unforeseen catastrophe never reopen.
Lack of adequate cash reserves wipes them out.
The good news is that fixing cash flow problems is something any business owner can tackle with a step-by-step approach.
Even better news? Fixing cash flow problems doesn’t just prevent future problems, it actually positions you to take advantage of the biggest opportunities the future may hold for you.
The first and most obvious reason is that cash flow is absolutely essential for day-to-day operations.
Paying bills, buying supplies or inventory, paying employees, servicing debt, etc, are all part of normal operations.
Every business should have more cash inflows than outflows to meet these basic business expenses. You don’t want to be borrowing money to carry out regular operations. That’s a sure sign of insolvency.
Next, you want surplus cash for emergencies. As mentioned, small businesses are especially vulnerable to larger disasters, many of which you can’t even get insurance coverage for. Adequate cash reserves can serve as a valuable emergency fund that can keep you going until you’re back on your feet.
Good cash flow is also important for growth. Investing in your business — whether through more marketing, product expansion, or hiring new employees — requires extra cash on hand.
Finally, good cash management allows you to build up a cash reserve that acts as a “war chest” or “opportunity fund” to take advantage of new opportunities that present themselves.
Yes, the stock market just hit new highs this week, And yes, GDP and jobs reports came in with good numbers.
That still doesn’t erase the fact that we haven’t had a recession in the U.S. for over 10 years. That’s an unprecedented hiatus, and everyone knows it can’t last forever.
In fact, the family offices of the world’s wealthiest families have been stockpiling cash for some time now. They aren’t doing it out of fear either.
They simply know that when the next recession hits, cash will be king, and impressive assets will be available at bargain prices…
But ONLY if you have cash on hand.
Rookie investors (especially those who never experienced the hard lessons of the 2008 crash first-hand) think being fully invested all the time is the right play. And many people are just now jumping on the investing bandwagon as the stock market is reaching new highs.
But the stock market is not a good place to “store” cash. Yes — you can usually access it fairly quickly. And many equity trades are now free. The problem is that you don’t know how much money you’ll have access to each day.
Imagine the market dropping 15% right at the same time an emergency comes up and you need cash. You might be able to sell the stock easily, but you’ll have to sell for a loss, and that’s not how to manage good cash flow.
Step #1: Better Financial Organization
This seems pretty basic, but an amazing number of small business owners do not have good recordkeeping or bookkeeping.
Better organization of your finances has several benefits.
First, it allows you (or your accountant/bookkeeper) to generate regular reports so you can see at a glance how your cash flow is doing. By doing a financial check-in once a week or once a month, you’ll be able to make intelligent cash forecasts and quickly see your financial health by tracking just a few KPIs (Key Performance Indicators).
The advantage to you is that you actually spend less time fretting about your money because the reports tell you what you need to know in a very quick way, so you can pivot or make any needed adjustment fast.
Good record keeping also helps you save on taxes because it gives your CPA/tax planner the information they need to analyze your tax situation before tax season. Being reactive about taxes instead of proactive is a sure way to leak unnecessary cash flow and hobble your efforts to build up a cash reserve.
Step #2: Cash Flow Optimization
Once your finances are organized and you are generating regular reports to review, you’ll be able to spot other cash flow inefficiencies besides tax savings.
For example, you may notice that you’re paying for online services that you never use anymore.
Or you might see that your loan repayments are eating up a huge chunk of your monthly cash flow. Paying down inefficient debt, consolidating loans, or renegotiating rates are all optimizations that can save you hundreds or thousands of dollars in monthly cash flow.
In fact, our 1-on-1 clients report monthly cash recovery of nearly $2,500 just from the cash flow optimization techniques our team helps them with.
Step #3: Create an Automatic Wealth Ladder
Most business owners have trouble saving up enough cash reserves because they are using up all their available cash flow for “necessities.”
But after getting organized and optimized using steps 1 & 2 — the next step is to use your newly recovered cash flow to build up reserve funds in an automated way.
The Wealth Ladder approach works almost like magic to accomplish this.
First, you take out a set percentage of every cash inflow (just like the IRS takes taxes out of paychecks automatically before people can spend it) and automatically sweep it into a separate, highly liquid account. Safety and liquidity are most important for this — so a simple bank savings account is fine.
Once you have 6 months of reserve cash in that account, you can “ladder up” to putting all future sweeps into a more secure, higher-yielding account.
What kind of account should you use? This is up to each individual, but many of our 1-on-1 clients choose to put this “opportunity fund” money into a Cash Flow Banking account.
So that’s why we list Cash Flow Banking as…
Step #4: Use Cash Flow Banking to Mitigate Risk, Hedge against Volatility, and Allow Every Dollar You Save Do the Work of $2
Cash Flow Banking is one of the most efficient ways to store cash and build up a war chest or opportunity fund.
You can find out more about Cash Flow Banking on their official site, and you can even schedule a call to talk with a certified Cash Flow Banking specialist there.
But essecashflowbanking.comntially, Cash Flow Banking allows you to store your extra cash in a secure manner, grows it at a competitive rate, and gives you access to the cash within a couple of days.
Taming your cash flow and building up a cash reserve won’t happen by itself. You need a plan and a system. Otherwise, Parkinson’s law kicks in and your expenses will quickly rise to the level of any new income.
So if you’re interested in building up a cash reserve so you can have more peace of mind, and be positioned to take advantage of new opportunities in the future, here are 3 ways to get started:
Build the life you love,
The Builders at Wealth Factory
In the high-stakes world of entrepreneurship, building sustainable wealth is a constant challenge. Between navigating…
As the global consciousness around climate change and environmental responsibility continues to grow, investors are…
Recently, Wealth Factory had the incredible honor of donating the first pitch at the Arizona…
In the unpredictable world of entrepreneurship, economic uncertainty is as constant as the tides. But…
Tax planning might not be the flashiest part of being a successful entrepreneur, but it’s…
If you own a small business, you'll want to pay attention to this. There's a…