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Business success is dependent on a solid financial foundation & success looks different to everyone & there is a lack of equity of access to resources and information for small business owners and independent contractors & there is a societal narrative making us believe “balance” is our ultimate goal & … There are so many “&”s that impact being your own boss. Let’s have some frank discussions on the basics of business with a holistic focus on everything that helps business owners define and find success.
Molly 0:08
Welcome to TheAmbiguous &: Business Basics and Beyond, the podcast where we have frank discussions on the basics of business with a holistic focus on everything that helps business owners define and find success. Each episode is a reminder that success isn't one thing, it's a whole lot of ambiguous ands. Like, subscribe or follow and let's explore these ambiguous ands.
Molly 0:36
Hello and welcome to The Ambiguous &: Business Basics and Beyond. I'm your host, Molly Beyer, and I'm here to lead you through frank and holistic conversations on the basics of business. Today, we're going to talk about small businesses, what they are, why so many of them fail, and, most importantly, how they can thrive. This isn't just about making numbers work. It's about building something sustainable, purposeful and resilient. So let's start at the top. What is a small business? According to the Small Business Administration, a small business is any privately owned company with fewer than 500 employees. That's a pretty broad definition, but most small businesses look very different from this. Here's what the numbers actually say. 81% of small businesses have no employees at all. The vast majority of those are sole proprietors or single member LLCs. Even among employer firms, many are still small. 50% are S corps and have fewer than 50 employees. And yet these businesses are the heart of our economy. 99.9% of all US firms are small businesses. Nearly half of the private sector workforce is employed by them, and they generate a significant chunk of the country's GDP and payroll. The pandemic shook the business world, though. In 2020 alone, nearly 30% of small businesses closed. That's triple the usual closure rate. But there was also a spark of resilience. In that same year, 4.4 million new businesses were started. That's the highest number on record at that time. In 2021 that number grew to 5.4 million. 2022 saw 5 million new businesses, 5.5 million in 2023 and 5.21 million in 2024. Clearly, the spirit of entrepreneurship is alive and well, but survival is another story. So why do so many businesses fail? We know that 20% of small businesses will fail in the first year. One in three aren't going to make it past the two year mark. By year five, half will be gone, and 65% won't make it to year 10. But there is a silver lining, because according to score, 82% of those failures were due to one root problem, cash flow. This means the difference between failure and longevity for many businesses is how they handle the movement of their money, not just what they earn, but when and how the money moves in and out of the business. So what is cash flow? Now this is a concept that many business owners struggle with. I've also seen many bookkeepers and accountants struggle with it as well, so don't feel bad if you don't really understand what it is.
Molly 3:19
Let's break it down simply. Cash flow is the movement of money in and out of your business over a period of time, but it's not the same as profit. Profit is what's left after your expenses, but cash flow is about availability, what's actually in the bank and when. Now, there's three primary types of cash flow in a business. You have operating activities, and that's the money that you make and spend running the business day to day. You have investing activities. Those are things like buying or selling big assets like equipment or property, purchasing securities, acquiring businesses, lending money and more. Financing activities are things like taking out loans or issuing stocks or bonds, or even payments made to and from owners or creditors, things like paying dividends and again, many more. Cash flow can be positive, meaning there is more coming in than going out, or it can be negative, which is the other way around. A negative cash flow also doesn't always mean a business is failing, but if it's left unchecked, it can definitely lead there quickly. So why does cash flow matter so much? Let's look at an example from the pandemic. We saw many large old businesses fail in that first year, as well as some of the smaller businesses that we discussed earlier. When you have a large business, a lot of times you're operating on an accrual basis, and we'll talk about the difference between cash and accrual for reporting in taxes in a future episode. But basically, you're looking at what you're expecting to come in versus what you're expecting to go out. So during the pandemic, we had businesses that had to close their physical locations. So what they were expecting to come in in business didn't happen while they still had to be spending money out for things like rents, orders already received, sometimes even for payrolls that are promised or that they decided to pay, because it was a struggle for people anyways. So what ends up happening is that there's not actually enough cash available to pay what needs to be paid, so you have to declare bankruptcy after a while if you can't liquidate assets or access money quickly. So that's where it becomes an issue. And we know this from the way that we look at money. Most of us probably couldn't weather a three to six month unemployment in our family without losing everything that we have. It's the same way with businesses, they're always looking at what's supposed to come in versus what's supposed to go out. And if you don't have the cash to back either of those up, that's going to cause a problem. So here's what a cash flow can help you do. It can help you pay your bills and your people on time. It can help you run and grow your business without constantly reaching into your own pocket. It can attract investors or lenders who love to see a strong cash position, it can make better decisions on pricing and inventory, hiring and spending, and most importantly, it really helps you stay in business during those lean times. Managing cash flow isn't just about spreadsheets, it's about survival and it's about peace of mind.
Molly 6:36
So now that we know what it is, let's talk about the best ways to manage it. Best place to start, build a budget. By building an operating budget and sticking to it, businesses are able to finance their own activities through profits. This is an ongoing process we work through with our new clients with a goal to help them get to their operating budget and then help them to increase their profits. You can also protect your credit, pay your bills on time, keep your net terms with vendors as low as possible, and don't delay payments unless you have to. Follow the saying, you can only get a loan when it looks like you don't need one. Watch your cash flow so you can borrow money before you need it. Manage your inventory well. Inventory is a business asset. Manage it like it was cold, hard cash, because that is essentially what it is. Have a savings reserve. Now, I know this one is hard and it's not always possible early on in a business, but having at least three to six months of expenses and savings can mean that difference between staying in business or closing up shop. Again, many of the businesses that failed in the pandemic did not have the reserve available to allow them the time to pivot. Many small businesses also seek financing to expand and strengthen their financial health and create a reserve. And when you ask for money, ask for twice what you need. 75% of all small business applicants receive some of what they asked for, but not all, but less than 50% receive all of the financing that they asked for, and remember to ask before you need it, so that you have that reserve available. And do you know what a business needs to secure that financing, complete and accurate financial records that are created and maintained well and regularly by either a bookkeeper or a tax professional. This is where it all ties together. Clean books let you see patterns, predict problems and make better decisions. Look for tax or bookkeeping professionals offering proactive guidance and with a track record of success with their clients. And this is going to be a long term relationship, so personality fit is a very important piece of this as well. And while all bookkeepers help manage transactions, not all are focused on the additional aspects of business management that can affect your cash flows. You want them to help manage your cash flows, prepare you for funding and navigate the emotional weights that come with financial uncertainty. And now I'm probably biased, but I also think a good bookkeeper or accountant will help you track your time. They can help you determine when it's time to outsource or hire. They'll talk to you about your goals, whether it's staying small or sustainable or growing to sell. And they're going to also hold space for the emotional side of business ownership, because, yes, it is emotional. The truth is that many business owners are overwhelmed, and they do need that true ally with them. So final thoughts for today, cash flow is one of the most important indicators of your business health. It's not just about money, though. It's about clarity, confidence and being in control of your story. If you're feeling stuck, overwhelmed or uncertain, know that there's help. There are systems, there are strategies, and yes, there are people who care and are ready to support you. Thanks again for hanging out with us today. We'd love to hear your feedback on today's episode, as well as any requests for future content. Drop a comment or suggestion and join us next time for more frank and holistic conversations on the basics of business. Please also like, subscribe or follow, so you never miss an episode, and until next time, I'm Molly Beyer, and this has been The Ambiguous &: Business Basics and Beyond, have a wonderful day.