A few years ago I did a series of columns for USA TODAY about how to be a successful franchisee. Although I have started two businesses, I had never owned a franchise, and so I spoke with several people in the franchising industry, including a few very successful franchisees. I wanted to know what the successful franchisee does right.
Some of the things were self-evident: Great franchisees tended to be great bosses, they understood marketing and advertising, they took advantage of all of the perks that came with the franchise system and so on.
But one trait that came out of this research was unexpected: Successful franchisees are good at managing their cash flow.
Cash flow? Yes, cash flow.
A Subway franchisee explained it with this story: A competitor had opened an ice cream franchise near him one spring. The store had been very busy all summer but by the next February, it was out of business. The gossip on the street was that the owner did not manage his cash flow properly— he hadn’t planned for business to slow down in the winter and had not budgeted to make his summer windfall last through the colder months.
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When discussing entrepreneurship and small business, plenty of big, fun ideas get bandied about, but cash flow usually is not one of them. And yet, the fact is if you want to be successful then you have to manage your cash flow well, period. It is one of those unglamorous, yet completely necessary, things that make a business work.
Consider this sobering statistic from Dun & Bradstreet’s Failure and Startups Analysis: Businesses doing cash flow planning once a year have only a 36 percent survival rate over five years compared to those that plan monthly, which have an 80 percent survival rate.
(A side note: It is important to understand that cash flow is not the same as profit, though they may seem similar. Cash flow is the cash position your business is in every month as funds come into and out of your business. Profit is the excess of income after expenses.)
My friends here at Bank of America and I presented a webinar on November 8 (if you missed it, check it out here), where we discussed cash flow management and highlighted just how important cash flow is to the success of a small business. We also developed a white paper (An Introduction to Cash Flow Management), which is accessible here on the Small Business Community. These materials were designed to help you better understand how to manage your cash flow, which can essentially be divided into two categories – inflow and outflow. If you can get a handle on each of these, your cash flow situation will be solid.
Inflow is simply a matter of making money and getting paid. To increase your inflow, you need to:
- Invoice on time
- Get your invoices paid on time (no more Net 60!)
- Have enough sales to generate enough ongoing income to handle your debts (your outflow) in a timely manner
Outflow is your costs. It is the combination of your debts, expenses, overhead, taxes, labor and so on. Aside from maximizing your inflow, the other way to increase your cash flow situation then is to get a handle on your outflow. This would include: