February 7, 2022
Many businesses fail every year, and the majority of them fail due to poor cash flow. The reason is simple: They can’t pay their bills, their employees, or their suppliers. They can’t hire new talent, and they can’t keep their clients. They really can’t do much of anything without cash. This is especially true of small businesses that don’t have enough money to begin with or don’t understand the importance of cash flow. These could have been great businesses, but they end up failing due to not having cash. Maybe you’re thinking that cash really isn’t that important. We’d argue the opposite. In fact, we recently published an article about why cash is king in your growth. Now, let’s talk about how that lack of cash can stunt and ruin your business.
Now, it’s important to note that the business’s expenses, especially during the early stages, are most likely going to be greater than their revenue. With many businesses we’ve worked with, they’re burning money. This isn’t a huge concern, especially in businesses that need a lot of capital upfront. It can be dangerous, but it’s not the end of the world. However, eventually, businesses have to generate positive cash flow or they will not be able to sustain the business. This goes for every business, both the ones burning cash and the ones bootstrapping. That early stage debt cannot continue in a healthy business.
On the other hand, many businesses manage to stay afloat, but their business is stagnant because they lack the cash that would present them with opportunities for growth. What many companies don’t understand is that cash flow is more important than profits. You might land a big client that gives you the potential to generate a positive cash flow, but if they aren’t paying you on time or if they keep lengthening their payable schedule, you aren’t getting your cash when you need it, and your cash flow will most likely take a serious hit. That lack of a positive cash flow not only affects your business, your employees, and your ability to hire the top talent you need, but it also affects your suppliers, your freelancers, and your reputation.
This is why it’s so important to have cash reserves. Cash reserves are your insurance against a whole plethora of things. They protect your business during periods of economic downturns, they allow you to jump on new investment opportunities, which help grow your business, and they can bring in the quality resources you need to meet client expectations. When you lack cash, you are stunting your growth, missing opportunities, and putting your business at risk of losing clients or failing altogether.
A lack of cash means you have to work with the resources you have, which often leads to allocating the wrong resource to the wrong project. This can lead to an unsatisfied and unmotivated workforce, which then leads to a decline in quality, and ultimately, an unhappy client. Unhappy clients don’t stick around long. So it’s clear that the lack of cash can seriously hurt your business.
Cash goes beyond just having funds because it affects your business in so many ways. In fact, it can even impact your reputation. If you don’t have the cash to pay suppliers, or you have to delay payments, you can cause major issues for your business. Word of mouth travels fast, especially when it’s not good news. You can earn a reputation as a company that doesn’t pay its bills or can’t pay them on time. This makes it hard to secure new suppliers, which, in turn, makes it hard to grow your business.
The same holds true if you hire contractors to meet a client’s needs and then can’t pay them or pay them late. Your ability to find good talent will dry up, leaving you with few options and less than desirable resources to choose from. When your suppliers cut you off or your contractors look elsewhere, you find yourself without the supplies and talent you need to meet your client’s expectations. If you can’t rectify that, you’ll lose your clients as well. Without cash, you won’t have the means to rectify the situation. People don’t wait around, especially in the creative agency world. If you lack the cash to hire fast enough to accommodate client needs, then you won’t be adaptive enough for your client. Essentially, a lack of funds translates into a missed opportunity to grow your business.
Having positive cash flow is important, because without it, you can’t grow your business. Cash gives you options and flexibility, which will allow you to quickly jump on opportunities. If you’re not prioritizing cash in your business, it’s something you need to consider. Here are our top tips for growing your business and prioritizing your cash flow:
Not all clients will pay you quickly, which can leave your business strapped for cash. When you don’t have positive cash flow, it’s important to negotiate quick payment terms with your clients. This will allow you to better allocate your resources, pay your employees, and stay in business. For example, when you are getting bigger clients you should expect longer revenue receivable days as they have long processes to approve the invoices and usually ask for longer net days to pay, so you need to think about the consequences that might have. This is perhaps the most important thing to do when growing your cash reserve.
There will always be money going out in a business. There are expenses to be paid, but the issue is when it’s being paid. If you pay all of your bills on the first, but you don’t get paid until the fifth, you’re going to overdraw your account. You won’t have any cash. Instead, especially as your business is growing, ensure that your payment cycles happen so that money comes in before money comes out. Then, use the leftover cash as your reserve.
One thing we do is hire in advance and train our people. You might be wondering, what does this actually have to do with cash flow? Well, it prevents our teams from being overloaded. It also gives us more people on the ground, so when the opportunity comes, we are ready and able to deliver with the highest quality resources.
If you’ve hired enough people, and you have cash to jump on opportunities, you need to give your clients a consistent experience. With our adaptive model, we can move resources around quickly to accommodate the needs of our clients. But we are only able to do that because we have the reserve cash in place. Because we give our clients a consistent experience, they’re happy with our work. We’re able to deliver in the best ways, which opens us up for gaining more business, and thus, more cash.
Your employees are the backbone of your business. They're the ones in the trenches, putting in the hours, and coming up with the new ideas and winning strategies. The bottom line is you have to invest in your people, or your business will suffer. It’s guaranteed. One way we invest in our people at Ladder is by resourcing. As part of our operational model, they work 120 billable hours out of 170 contractual hours. They can use the extra 50 hours for just about anything else. This includes holidays, time off, training, sick leave, or whatever else they want to use it for. We don't push our people to work over 120 billable hours. Doing the math, 120 billable hours is 70% of their contractual hours. This means that if we didn't have cash, we wouldn’t be able to invest in our people in advance, and we wouldn’t be able to hire the right people.
We don’t believe in overtime because that leads to problems such as employee burnout, stress, and employee churn. This adds up to an unhappy worker, who won’t give you their best. Not to mention, depending on how you pay your employees, overtime can lead to a much higher cost for you.
It’s extremely important to have a positive cash flow because you can then invest in your people, in your resources. This way, you avoid overloading them with work and aren’t putting pressure on them to work longer hours. This not only upsets the work-life balance, but it also hurts performance, which hurts quality, which negatively impacts the client. But if you lack the cash to employ this model or a similar one, you don’t have the opportunity to invest in your people. This will undoubtedly lead to stunting the growth of your business.
We know that cash is just one aspect of growing your business. As growth marketers, we’ve seen the importance of having cash reserves in every business we work with. Do you know the importance of cash, but still don’t seem to be growing? Talk to one of our growth strategists today to see how we can help.
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