Business futurist, award-winning author, speaker and columnist
As you know, the U.S. banking system has been challenged this year. Three large “regional” banks collapsed, and not a few experts have opined that there will be more banking-sector bloodshed going forward.
As you may remember, in our online poll last week (see below) we asked about concerns for your bank and the U.S. banking system with this question: “In light of the 2023 bank failures, have you been concerned about your own bank?” [Continue Reading]
Right now, and likely for a while longer, there’s a lot of stuff coming out about challenges in the U.S. banking system. Sometimes it’s difficult to sort through the range of comments, from the smart to the stupid. But if you’ll give me five minutes, we’ll find some clarity so you can not only make better banking decisions for yourself and your business, but also for our country.
Watching a segment of a business news program recently, the conversation was about the impact on the banking system from the dramatic collapses of two very large San Francisco banks, Silicon Valley Bank (SVB) and Signature Bank. One of the guests, a celebrity “financial expert,” made this statement about the future of banking: “America no longer needs 3,000 regional banks, since most of us do our banking online.”
This stupid comment pulled off the hat trick: ignorant, inaccurate, and dangerous. On its face, the statement is factually incorrect – no American bank sector corresponds to the number he used. It’s ignorant from a marketplace standpoint because it assumes all banking is done online. And in the Digital Age, when inaccuracy and ignorance come out of the mouth of a so-called expert in a single comment, it can become dangerous.
So, let’s establish some clarity and avoid the danger by thinking of America’s three commercial bank sectors in the context of [Continue Reading]
This is another offering in my ongoing series on understanding the fundamentals of business as we become better business managers. Remember, fundamentals are like natural laws: they don’t change; they’re the same for everyone, and you can’t succeed without understanding and respecting them. The fundamentals today are all about funding growth.
Consider the following scenario that plays out on Main Street every day:
“Finally, my business is growing,” a small business owner confides to his friend, “but why is it creating so much negative cash?” And then, with that deer-in-the-headlights look, he completes his report, “I thought by now, with increased sales, cash would be the least of my worries. I used to be afraid I couldn’t grow my business; now I’m worried it will collapse from growth.”
This entrepreneur’s lament is one of the great ironies of the marketplace: a small business in danger of failure succeeding itself right out of business.
Beware Blasingame’s 2nd Law of Small Business: It’s redundant to say, “undercapitalized small business.” This maxim is especially true for fast-growing companies because revenue growth depletes cash in two dramatic but predictable ways. [Continue Reading]
This is the last of a three-part series covering what I call The Five Financial Mysteries. The first three Mysteries were about the relationship between cash, accounting, and profit.
In this article, I’ll complete my attempt to help you avoid becoming part of the business failure statistics. If you haven’t seen the first three Mysteries, be sure to look for the previous two articles nearby. Now, buckle up as I reveal Financial Mysteries Four and Five.
Financial Mystery Number Four
You can get squeezed between vendors and customers.
Vendors and customers are the prime entities you deal with financially every day your business is open. Understanding your relationship between these two – literally between, because your business is in the middle – is the key to cash flow management. The way to avoid getting squeezed is by managing your Accounts Receivable (A/R) Days and Accounts Payable (A/P) Days. Warning: This will get a little mathy, but not difficult IF you have current records.
A/R Days is the time it takes to collect from customers for sales you made on credit. Divide the A/R total on your balance sheet (you do have a current balance sheet, right?) by total sales revenue from your P&L (you do have a current P&L, right?) then multiply that quotient by 365.
Example: Accounts Receivable $80,000 ÷ $750,000 Revenue = .1067 X 365 = 38.9 Days Receivable. You took an average of 38.9 days to collect your receivables.
Next, A/P Days – the time you take to pay vendors for purchases. Divide the A/P number on your balance sheet into your cost of goods sold (COGS) for the period from the P&L. Then divide that quotient into 365.
Example: COGS are $450,000 ÷ $35,000 Accounts Payable = 12.86. Then 365 days ÷ 12.86 = 28.4 Days Payable. On average, you paid vendors within 28.4 days.
The relationship between your A/R Days of 38.9 and A/P Days of 28.4 shows that on average you paid vendors 10.5 days faster than customers paid you. That means, without cash from other sources, you will experience negative cash for over 10 days.
That number – 10.5 days, is the magic number every business owner should know about their business. Your company could very well be profitable and growing. But in this case, for a third of a month, you will be out of cash, unless you rely on credit or have working capital from retained earnings (profit).
Now that this mystery is revealed, here’s how to make this cash shortfall essentially go away: use a combination of taking longer to pay (4 days), collecting sooner (4 days), and covering the other two days with organic capital in the form of retained earnings (profit).
Financial Mystery Number Five
Profit is the Queen of Business, but Cash is the Emperor.
Does this sound like having cash is more important than making a profit? Well, it is – sort of.
It’s always important to make a profit. It’s the protein your business must have to become strong and muscular, so you can work through periodic unprofitability that befalls almost every venture. But even a profitable business will be out of business if it goes too many days without cash.
The most intense, anxious, and anguishing moments of your career as a small business owner won’t be when you don’t make a profit, it’ll be when you’re out of cash. Manage your business for profitability but operate it for cash flow.
Now that the Five Financial Mysteries have been revealed, you should have a better handle on the relationship between cash, profit, accounting, and the impact of time on all financial aspects of a business. And you should be able to remain part of that other business statistic: the millions of successful, profitable, sustainable small businesses.
Write this on a rock … Let’s rope all Five Financial Mysteries into one short, handy sentence: Buy low, sell high, keep track.
This is the second of three articles on how to prevent your firm from becoming part of the increasing mortality statistics of U.S. small businesses. That’s right. The SBA reports that 50% of small businesses fail in the first four years, instead of five years, as they reported 20 years ago.
In this series, I’m revealing what I call the Five Financial Mysteries. Actually, they shouldn’t be mysteries at all – they’ve been around for generations. But with this much Main Street carnage – a 20% increase in startup failures – it’s obvious to me that a lot of people haven’t learned what you must be able to do to sustain your business: fundamental financial management.
If you think you’re an excellent financial manager, then you won’t find any mysteries here. But if you think you think you could use a little help with your financial management, then this series could be just what you need. Don’t worry, we won’t get too mathy.
In the previous column, the First Financial Mystery was revealed: Cash and accounting are not the same things. Today you’re going to discover the Second and Third Financial Mysteries. [Continue Reading]
This is the first article in a three-part series on how to prevent your operation from joining those who are driving the increasing mortality of U.S. small businesses.
One of the pillars of the American Dream is the ability of any citizen to start a business from scratch, build it, own it, and pass it along to their heirs. Research indicates that there are more than 25 million of these dreams come true in the U.S. Approximately eight million have employees, the balance are independent contractors, professionals, etc., and together they create half of the U.S. economy. All of that is the good news.
The bad news is that the rate of small business mortality – when the dream turns into a nightmare – which was once 50% in five years, has now increased by 20% in the past 20 years (U.S. Small Business Administration). The reason for this unfortunate trend is associated with Blasingame’s 1st Law of Small Business: It’s easy to start a small business, but it’s not easy to grow one successfully.
The smoking gun that kills most small businesses is the founder’s ignorance of or disregard for the financial fundamentals of business. And most of this business carnage could be avoided if every Founder understood what I call the Five Financial Mysteries. In this installment, I’ll reveal the first Mystery with the others to follow soon. [Continue Reading]