When times are full of plenty, a business even without a healthy cash flow and marginal profitability can generally survive and scrape along. But, when the economy really sours, as it did from 2008 (and still hasn’t recovered yet), that’s when cash flow is impacted, account receivables get behind the curve and credit is almost impossible to secure from your friendly bank.
Let’s admit it, cash flow is king and the life blood of a business and companies that produce consistently high and growing levels of free cash flow are unlikely to go bankrupt. However, if the regular flow becomes erratic, then running your business now becomes a nerve wracking experience. Any business owner who’s been in this position, will attest to this situation being his/her number one fear.
Even with a superb rating, credit is dependent on good cash flow. The number one obligation of course is payroll and it goes down from there. Easy to hold a creditor or two off for an extra 30 days, but in most states the law won’t allow you to do that to your employees.
According to the U.S. Census Bureau more than 200,000 small businesses vanished between early 2008 and 2010 — a period covering the Great Recession and its immediate aftermath — taking with them in excess of 3 million jobs, according to Census figures which illustrate the depth of the country’s economic hole.
So, the take away moral of this story is to collect your AR as regular as clockwork, run a well oiled and efficient business in more of a frugal manner, and don’t get too complacent that it won’t happen again and not to you. History is full of cycles and it will happen again…but next time be prepared.