Strong cash flow is critical for entrepreneurial success.
But 50 percent of all small businesses crash within five years because their founders are weak in financial literacy, according to a report by the JPMorgan Chase Institute.
“Growth, Vitality, and Cash Flows: High-Frequency Evidence from One Million Small Businesses,” stems from data compiled from accounts at JPMorgan Chase.
It’s the nation’s largest bank and is an advocate for small-business education programs.
The report makes it clear that such small-business failures stem from a lack of knowledge about cash flow and maintaining a cash buffer.
“Small businesses don’t fail because it’s a bad business,” Chris Wheat, director of business research for the JPMorgan Chase Institute and the lead researcher on the study.
“They fail because of cash flow problems,” he explains.
The report’s conclusions emphasize establishing and maintaining an emergency fund, and fully understanding how to sustain cash flow – that’s income and expenditures.
Least successful startups
Mr. Wheat analyzed the businesses that suffer from poor cash flow. Restaurants fare the worst.
The study indicates restaurants only last 3.7 years. That’s the shortest lifespan of a dozen industries that were studied.
Restaurants typically are hit by unanticipated expenses while trying to cope with irregular income.
Negative surprises occur because restaurants must continually buy supplies at constantly changing prices vs. an unpredictable flow of customers. Changing seasons are a factor.
“Restaurants we consistently find have more pronounced small-business challenges,” says Mr. Wheat.
“Restaurants tend not to be holding a lot of cash in their accounts. And if you put that together with any amount of volatility, it’s not surprising to see they have the highest likelihood of exiting,” he adds.
On the other hand, the study shows the most-successful businesses are real estate firms. They average a nine-year lifespan.
Their income and expenses are more predictable and stable. That means they find it easier to maintain a good cash flow.
So, if you’ve got an entrepreneurial idea, make certain you’re strong in understanding finance. Get a mentor and take whatever financial training programs you can.
Do this, and your dream will come true.
From the Coach’s Corner, here are relevant tips for entrepreneurial success:
You Can Creatively Manage Your Cash Flow 7 Ways – If you’re taking the pulse of your business, of course, the first thing to consider is your cash flow. If your cash flow is poor, you feel poor because you can’t pay the bills nor can you use money for what you’d like to do.
For the Best Cash Flow, Manage Your Inventory Costs with 8 Tips – With proper inventory management, you can lower your expenses and increase your cash flow. For many businesses, it means taking a look at your inventory costs.
Checklist — 11 Tips to Increase Your Startup’s Cash Flow – Cash flow is the salient dynamic that leads to the failure or success of a business. Here are 11 Biz Coach ways to maintain positive cash flow.
Angel Investor: Tips for Increasing Cash Flow, Profits — A successful angel investor shares his tips for good cash flow and other profit issues.
Small Business Options for Year-End Cash Flow, Tax Benefits – The fourth quarter is the time for small business owners to reflect on options for year-end cash flow and tax benefits. In general, here are items to discuss with your accountant and tax advisor.
11 Tips to Win Your Entrepreneurial (Marathon) Race – For successful small firms, strong cash flow doesn’t just happen. Advertising firms to tech startups have a system. They plan and implement with precision. Using these strategies, you, too, will win.
12 of the Best Financial-Planning Tips for Entrepreneurs – Typically, there are critical mistakes made by entrepreneurs. In essence, they’re so busy putting out fires, they leave their financial security in doubt.
“Starting your own business is like riding a roller coaster. There are highs and lows and every turn you take is another twist. The lows are really low, but the highs can be really high. You have to be strong, keep your stomach tight, and ride along with the roller coaster that you started.”