As I’ve shared in this blog I once owned a small business that did not survive the financial downturn that began in 2008. When times are good a lot of mistakes can be hidden, but when things get tight all the wrong decisions one makes becomes very obvious. Some people would blame the downturn for our business closing, but I did not do that. Some small businesses do not survive during good times, and many other businesses continued operating during the downturn. Ours did not survive, not because of the economy, but because of mistakes I made managing the business. As I reflected on those mistakes I wrote a book to help other small business owners avoid making the same mistakes. The book is titled Mistakes: Avoiding the Wrong Decisions That Will Close Your Small Business.
One of the mistakes I made was not managing our cash flow properly. A business can be profitable and still run out of money if that money is not managed right. I allowed us to run out of cash which made it difficult to pay our suppliers and meet our payroll and other expenses. As a result some of our biggest suppliers put us on COD which made it difficult to get the equipment and parts we needed to keep the business open.
When I took ownership of the business it had a policy of not offering credit to its customers. I took the advice of some of our long-term employees and continued that policy. We did not accept credit cards nor did we offer credit through any agency. That was a huge mistake because it meant that we were often carrying the credit ourselves through accounts receivable. Most of our customers paid when we finished a job for them, but some didn’t. At times we had substantial amounts on A/R.
To compound the problem I did not deal with those unpaid accounts when they began to age. We would send letters and occasionally take someone to court if the amount was larger, but those people often filed bankruptcy which meant we never got paid. It is a major red flag when accounts receivable begin to age because when they older it is less likely that you will get your money.
We did eventually began to accept credit cards, and we entered into an agreement with a lending institution to offer financing to our customers. This certainly helped our cash flow, but by then the damage had been done.
Another mistake I made in this area was to allow our cash to dip too low because of bad purchasing decisions. I once paid cash for a vehicle for the company which took a large chunk out of our cash balance. That vehicle should have either been financed or I should have bought a used vehicle instead of the new one to maintain an adequate level of cash.
There were other bad decisions which contributed to cash flow problems, but I did learn an important lesson. When you are out of cash, you are out, and in a small business it’s very difficult to build that cash reserve back up. I should have built up a cash reserve of six months of expenses that would have sustained us in almost any emergency we might have faced.
That may seem like a lot to have sitting around, especially if you want to grow your business fast. It’s a lot better to have the money available than it is to run out of money. If that happens you won’t have to worry about how fast your business will grow. You’ll just have to wonder how much longer it is before you close your doors.
Losing that business remains one of the most emotional losses of my life. Ten years later I still think about the pain and fear it caused me. I wrote the book to help others avoid going through that themselves. I think there’s a lot of wisdom in that book for $4.99 that can help you succeed in your business. Learn from my mistakes so you don’t have to make them yourself.