Its actually quite simple…
Because they can’t pay their bills.
If you’re one of the few that started your business being financially literate, have paid your bills on time and in time since the beginning, this post may not be for you.
But if you’re like MOST entrepreneurs and started out financially illiterate… Then read on.
Let’s take a step or two back. This should resonate for you or someone you know.
You know the story… You saw an opportunity, had the guts to go after it, take the risk, and build a company around that idea or opportunity.
But somewhere along the way you (or someone you know) ran out of cash and that was it…. Boom… Out of business… Party’s over
Companies don’t go out of business because they lack profits on their P&L… they go out of business because they don’t manage their cash appropriately and can’t pay their bills.
And guess what… Your customers, creditors, the IRS, your vendors, and even your employees DO NOT CARE. They just want to get paid for their time, goods, or loans.
So, why am I bringing this up? What’s the punch line?
Do we not spend cash, or get credit for our businesses?
Nope, that is not the point at all.
Here’s the point… You DO have to spend money to make money…
You have to spend it wisely.
Which frankly most business schools and certainly all these ‘courses’ by the ‘gurus’ do not teach.
Let me give you an example from my business.
As this example will show, its all about allocation and living within that allocation.
I will only allocate a small portion of our existing cash in the bank on new product ideas.
The rest of the cash is for paying bills and holding onto.
I MASSIVELY penny pinch with the cash we have and ALWAYS ask my team for a good case for why I should let any cash go before I make the decision to spend it.
I use lines of credit for purchasing existing established selling products, and will get terms or leases on capital equipment so I do not have to let go of the cash.
I look at cash flow and accounts payable more than profits. And I purchase things only AFTER we know we need it and that we have both the business case and demand to afford it.
Case in point…
We recently had explosive, unexpected growth and basically had to grow the company into the business we had acquired.
Now, this is EXACTLY what you want in a business and the case for spending money. So, it completely made sense to hire more people, adjust processes, purchase equipment, etc. We did not spend the money or capital BEFORE we established the business.
Only after it was apparent we had it and it was big enough to warrant the cash outlay did we spend.
While this is just part of the insane, yet rewarding journey of being in business, Cash Flow is King as the saying goes. And I believe that as cash goes the business goes.
Perhaps you have a different opinion or some experiences of your own you’d like to share in the comments below.
I’d love to hear them and would love any other feedback or comments you have.
Thanks for Reading!
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