By: Steven J Weil, PHD, EA, LCAM
According to the U.S. Small Business Administration, there are around 28.8 million small business located in America. Small businesses, which maintain fewer than 500 employees, account for 99.7% of all business in the US. Around 82% of small businesses fail due to cash flow problems, a US Bank study discovered. But, Dr. Weil says that cash flow isn’t the only issue that small businesses face. Below are 10 main reasons why business in America fail:
- Having too strong an attachment to sales at any cost.
While everyone knows sales are important, what is often forgotten is that sales without profits serve no purpose. Every sale needs to contribute to the bottom line.
- Cash flow is the lifeblood of every business. If you run out cash, the business dies. It’s important to understand what cash you do or don’t have for a given undertaking. Your cash flow is impacted negatively when you are carrying accounts receivable for creditworthy but slow-paying customers.
- Know your true costs. A business owner who forgets to include costs because they are not paid at the time of a sale can quickly find the business in the red with unaffordable payments due.
- Understand your sales tax and other tax obligations. Failure to collect sales tax from a customer does not get you off the hook for paying that uncollected sales tax. By the time an audit comes about, your lack of knowledge could cost you tens or even hundreds of thousands of dollars.
- Be sure to follow all employment laws. Both the state and federal governments have a say in everything from minimum wage to overtime. Even if your employees agree to something less, you can and will still be held accountable to comply with the law. Failure to do so can create huge financial liabilities.
- Keep good records, and do keep business and personal information separate. Not only will you need to have books and records for your business at tax time, but having accurate books and records can help you spot developing problems before they drag your business under.
- Consult experts when the need arises. Guessing at the tax consequences, labor rules or meaning of a contract can cost you everything. When you are not sure, consult an accountant, attorney or whatever expert. One thing you can be certain of is that consulting an expert to avoid a problem will be a lot less expensive than using an expert to resolve a problem.
- Be careful about borrowing. Getting cash today by pledging credit card receivables or factoring can be expensive and rob cash flow that you will need to operate. Be mindful of the cost of any borrowing along with the repayment terms.
- Never risk more than you can afford to lose on just one customer. We have seen more than one business allow a “good customer” to run up a large account or place an order so big that failure to pay or a problem with the order can result in a catastrophic business failure.
- Never let just one customer be responsible for more than 10% of your total business. A business that has one or two customers that represent 50% of its total sales is not really a business; it’s a de facto employee without the benefits.