According to the U.S. Bureau of Labor Statistics, for every ten businesses that start today, only three will be in operation in fifteen years. Most almost make it but drown close to the shore. They are swimming in the vast ocean of entrepreneurial bliss one moment, and out of the blue, a rip current pulls them under, and they are gone.
It is sad. Businesses that could be making a profit for a purpose, blessing their communities, and advancing that purpose fail daily, so close to making it.
You drown close to the shore when you run out of cash and don't know it. How can an entrepreneur be out of cash and not know it? It happens all the time.
It happened to Lydia. I remember it well. She put her heart and soul into her business, only to lose it all. The pain, loss, and humiliation nearly destroyed her.
Lydia was passionate about cooking. Going into the restaurant business had seemed the natural thing to do. She used her home and personal assets as collateral to get a business loan. The loan was enough to get her started in the new business.
The community loved and celebrated her. Food critics gave raving reviews, and customers opened up their wallets. Her cash drawer filled up.
Lydia's customers and the community loved her. But something dangerous had happened, and she was powerless to stop it. She had spent the money she needed to pay her vendors.
While she was splashing in the waves, the rip current was moving in.
Out of the blue, quarterly taxes were due. The vendors who had extended her credit to get started demanded their money. The utilities had to be paid. Payroll was due.
Lydia was out of cash. For a while, she "robbed Peter to pay Paul." She worked harder and longer, putting her nose to the grindstone. She started negotiating with her vendors. Every day she hoped for something magical to happen to turn everything around.
I remember the day Lydia poured out her soul to me. To cover payroll, her vendors, and the bank note, she needed $30,000 in cash. She had to have it that day, or it was over.
Lydia was so close to the shore, but she was drowning.
Looking back, she realizes her mistake. She should have monitored her cash flow every day, week, and month. Lydia watched the money come in, but she didn't realize how much of that money she already owed to her vendors.
She is not alone; Mike Michalowicz says:
The majority of small businesses, medium businesses, and even some big ones are barely surviving. That guy driving the new Tesla, whose children go to private school via chauffeur and who lives in a massive house and runs a $3 million company, is one bad month from declaring bankruptcy. I should know; he's my neighbor.
Successful entrepreneurs monitor their accounts every day.
Every day you know what has to be paid and how much income must be generated that day to cover that debt.
Every week you contrast what you have with what you owe.
Every month. Great entrepreneurs know the money they will need to cover their payables at month's end. And, having monitored this daily and weekly, this end-of-month need never catches them off guard.
In her intoxication, Lydia didn't realize that the cash she was spending had already been spent. She needed an accurate assessment of her cash flow.
Every day felt like Christmas to Lydia. Looking at the bank balance and full cash registers every day was intoxicating. It seemed like she was making a lot of money.
You should know that cash affects people; it drives them crazy. Cash will intoxicate you.
Lydia was similarly affected. The sad and dangerous part is that she didn't know it.
Lydia's kids paid some of the price with her in starting the business. So, when they needed things, she felt justified in paying through the company. Sometimes she charged them; other times, it was just too easy to grab cash from the register.
When Lydia bought groceries, she often intermingled the family groceries with what she purchased for the business. Feeling some celebrity as the town showed up every day at her restaurant, she got the more expensive nail job and charged it to the company. She did the same with new costly clothes.
And it seemed like every day, one of her customers would ask her to support their project or charity in the community. Lydia loved to give but felt obligated to give something every time she was asked. Lydia was so close to success. She was right at the shoreline. But just before she could proudly stand up and walk forward, she drowned. Lydia's story is repeated every day. These "Lydia's" call me, and my heart breaks for them. With a little coaching, they could have avoided the #1 overlooked entrepreneurial trap that would kill their business: Negative cash flow.
Are you drowning close to the shore? Have you already drowned, you just don't know it? Do you have an accurate assessment of your cash flow? Do you know how much money you need to make to cover your payables at the end of the week? Month? Year?
A daily liquidity report is a must for successful entrepreneurs. Looking at these numbers every day will help you avoid the #1 reason why businesses fail: Cash flow problems.
Drop me a line and let me know if this helps, harryt@cultivatingimpact.biz Harry T. Jones
*Like all my stories, Lydia's story is real; names and some particulars are changed to protect the individuals involved.
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