Success Factors for Small Businesses – CFO Consulting Services

The number one issue for small businesses is liquidity. Liquidity has many different aspects that business owners must understand from the moment they open for business.

Internal capabilities

if the owner or co-owners are not good at understanding liquidity and how to manage the business accordingly, then they must hire someone to help with that. I’ve seen too many cases where the owner’s understanding of liquidity is to open the checkbook and see what the balance is.

Stage of the business

Understanding liquidity when the business is starting up is different from managing liquidity after five years. In the beginning, the company must have enough cash resources to cover all of the start-up expenses plus the cash needed while the company reaches break-even. Managing liquidity when the company is five years old (assuming that the company is profitable at this time) and is trying to expand capabilities is an entirely different exercise, but proper planning must be done to avoid surprises.

Drivers

Depending on the industry, the company must understand what are the key drivers that influence liquidity. Revenue is an obvious driver for most industries. For a food business, the food cost is another key liquidity driver. For a SaaS business, churn may be a key liquidity driver. Regardless of the industry, management must identify, report, and manage the key liquidity drivers to understand where the company stands and what improvements are needed.

Working capital

As noted before, depending on the industry, one of the key aspects of managing liquidity is managing the balance sheet or specifically working capital. Some industries, like wholesale distribution, provide credit to customers; therefore managing collections is key. Some industries, such as retailers, have a lot of inventory which, if not sold, creates a liquidity problem. Read more information on Working Capital.

External resources

Having access to additional funding, either through credit lines, bank loans, credit cards, or friends and family, is an essential part of liquidity management. Some expansions may require additional funding, and tapping into these resources may be a better solution than using the company’s resources. On the other hand, the company may fall into a seasonal downturn or into an economic recession, which may negatively impact revenues and therefore, may need access to fresh capital.

Understanding the impact of success factors

In summary, one of the key reasons why companies fail is insufficient capital or, in other words, not having the necessary liquidity to encounter the current market conditions. Whether they have too much debt or too little revenue, cash is king, and business owners must understand the different aspects of liquidity management.