Over the years, having trained, mentored and supported entrepreneurs throughout the country, I regularly find they have an all consuming relationship with cash (or the lack of it) in their business.
Simplistically, if the cash coming into your business is less than the cash going out, you have a problem. It doesn’t matter how fantastic the sales look. You could be breaking sales records, with much of it credit sales being settled a few months later. Or how much profit is on the table. You may be thrilled about the high margins in the business. It doesn’t matter when the cash flow is negative. Cash flow makes the final call about the business. What is perhaps most scary, the speed with which cash flow can take the business down.
Let me share two recent examples
COVID-19 cash flow crisis
During COVID-19, established, profitable business shut down due to the cash flow crisis. During the lockdown, sales dried up and in the absence of cash relief, it became impossible to continue operating the business. They couldn’t meet their short term obligations, including lease payments, staff salaries and more. Even those well managed businesses, with a few months of cash reserves struggled to survive. They underestimated the severity and duration of repeated lockdowns. While they came through the first lockdown, by the time the subsequent lockdowns arrived, they had depleted their cash reserves and were forced to to close their doors.
I was reading an article about the potential grounding of Mango airlines from May 2021 here and here. In summary, government promised to make allocations of funds for Mango, that they used to convince creditors to grant them an extension until January 2021 for repayments. When January arrived, government did not make the payment, they engaged further and by April were told to wait until June 2021. With creditors unwilling to wait for payment, they won’t have aircraft, effectively bringing their operations to a halt. The board wants to voluntarily submit the airline under a business rescue process. It gives them time as outstanding payments to creditors would be immediately suspended until the business is restructured.
In conclusion, the ability to consistently manage cash flow will determine whether your business will stay in business or abruptly come to an end.