From what I have read and heard, almost 20% of business fail in the first two years and a staggering half fails in the first five years.
Let’s think about that for a second. If both you and a friend of yours are each starting a business at the same time, either one of you will fail.
That’s the harsh reality. Now, do you want to fail?
It sounds like a rhetorical question, but the way I see it, there is one major thing, that will take the decision away from you and into the hands of the universe. Cash flow.
I understand that you guys might think it’s obvious, but at the same time it always gets overlooked. People think about salaries. They think about profit and loss. They even take time to consider market research. But they always neglect cash flow.
First of all, let’s look at this scenario.
You have John who has a business and it is booming. He is so sure of the success he’s going to have that he constantly invests every single penny.
On the other hand, you have Mary. She is an entrepreneur as well, but even though her business is growing fast, she always keeps a little cash at hand in case of an emergency.
Who do you think survives a big hiccup? Who do you think stands a chance against a dry spell?
Yes, obviously Mary will have a better chance, because she prepares for downs as well. There will always be downs after ups. You have to plan for those.
The ups are here to build a reserve for the downs.
Take small percentage from income
What’s the best way to do that? I recommend using the technique of taking a profit first from Michael Michalowicz’s book “Profit First”.
It is genius. In my opinion, you don’t even have to follow every piece of advice you read. But at least make sure to have your bases covered.
Put a specific percentage of your income into multiple accounts. One for taxes and every expense related to you running the business and the second is a profit account.
Naturally, that account is meant to be profit. But I honestly believe that should you hit a rough patch, you have money at your disposal that you wouldn’t have otherwise.
What to watch for in cash flow
Watching your cash flow is very basic. You need to understand your expenses and your income, or your cash out and cash in model.
Just because you send out invoices does not mean you have the cash and it sadly doesn’t even mean they get paid at all.
You have to concern yourself with what has to be paid when. At the same time, you have to see where and when the cash comes in.
It sounds so obvious and easy, but it’s almost an art. You have to see the flow of money through your business and make sure that more cash flows in than flows out.
And I’m not talking about profit, but actual cash.
As long as your cash flow is positive, there should be no reason, that you will fail.
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