Cash Flow: The Reason 82% of Small Businesses Fail

by Aoife Crean on Jun 7, 2019

82% of small businesses fail. There’s no hiding from the figures and it’s a wonder why anyone takes the risk.

So, if more SMEs fail than survive, with the odds stacked against them, what can small businesses do to stay the course?

The biggest killer is cash flow, or lack of.  

It makes sense that having money is one of the keys to making a business work, but the official definition of cash flow is, as explained by Investopedia “the net amount of cash and cash-equivalents being transferred into and out of a business”. Ask any seedling business and they’ll tell you that in the early days the flow seems much more outward than inward, but money has to be moving for business to have a chance of success.

It’s equivalent to the blood circulating around our bodies - the business’ lifeline. Once the flow stops, it’s tantamount to instant death.

Banks are only just emerging from the era of grouping SMEs into their retail banking offerings, just beginning to shed light on the needs of this segment, incidentally, very unlike those of the average bank user.  Only when banks truly interiorize the need for specific banking options and help for small businesses, will entrepreneurs have the support they need to survive.

The team at Profit Books rightly point out that profit doesn’t necessarily equal good cash flow.

“You can’t just look at your profit and loss statement (P&L) and get a grip on your cash flow. Many other financial figures feed into factoring your cash flow, including accounts receivable, inventory, accounts payable, capital expenditures, and taxation".

"Effective cash-flow management requires a laser focus on each of these drivers of cash, in addition to your profit or loss. Rules of accounting define profit simply as revenue minus expenses.  However, a smart business owner understands the fact that whether you earned a profit is not the same as knowing what happened to your cash”

If cash flow is in order, profit will come.

According to Quickbooks’ study entitled The State of Cash Flow Report which delves more deeply into the situation that currently faces small businesses, 61% reported experiencing cash flow issues on a regular basis.

Planning is Paramount

One major error SMEs commit is spending now, thinking later. Whilst it’s true that the initial investment in a business venture is greater than later on, it’s good practice to consider how long current funds would last even in the event of zero income. 1 month? 2 months? A year? It is a good idea to know what kind of a buffer is available for when business is slow. With any business come historical highs, but paralyzing lows too. Planning is essential.

21% of small business owners in North America (U.S. and Canada) do not have any projection management process in place. For those who do have a process, 22% say it is conducted by hand and 23% say their process revolves around custom spreadsheets. (Mastercard Global Research & Insights)

Giving Due Credit

One of the biggest issues for small businesses is credit. It’s hard to come by, either because of a non-existent credit history and the worry for banks that companies will fall into arrears with their repayments, or because those that offer credit don’t offer it with the small business in mind.

According to a recent article published in Euler Hermes, “currently, bank loans make up around 70% of external financing for small to medium-sized enterprises (SMEs) in Europe, much more than in the US (40%).” What happens to the rest? Who helps the remaining 60% of businesses in the US that can’t get credit from their bank?

As soon as a business starts to show signs of trouble, delaying payments, extending the terms of payment with suppliers and playing the juggling game, banks tend to look the other way.

As the saying goes, “you can only get a loan when it looks like you don’t need one.” Once you’ve shown signs of being financially strained, your loan options dwindle dramatically. And even if you can get a loan, the terms will be far less attractive”. (Score.org)


Strands and Mastercard have joined forces to create the SME Cash Flow Manager. This allows banks to offer their small business customers a lifeline and access to Mastercard technology when they need it most.

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If you are interested in finding out how Strands can help your bank and would like to get a Free Demo of our SME Cash Flow Manager solution, please fill out this form and one of our Sales Reps will get back to you quickly.

About
Aoife Crean
Aoife Crean

Aoife Crean writes in her native English, Spanish and Catalan producing whitepapers, blog posts, news items and interviews relating to FinTech and trends in banking.

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