By John Gallagher
Detroit Free Press
WWR Article Summary (tl;dr) When it comes to keeping a business up and running, “Cash is King.”
Detroit Free Press
Probably everyone has at least daydreamed of starting their own business. A trendy restaurant, a vintage clothing shop, striking it rich with a new killer phone app — these are the dreams that keep entrepreneurs in the game.
But a new study released this week shows that however creative the concept, small business owners often lack the financial literacy to understand what they’re getting into. And that’s a big reason why something like half of all small businesses fail within about five years.
“Small businesses don’t fail because it’s a bad business. They fail because of cash flow problems,” Chris Wheat, director of business research for the JPMorgan Chase Institute and the lead researcher on the study, told me this week.
The study, titled “Growth, Vitality, and Cash Flows: High-Frequency Evidence from 1 Million Small Businesses,” is based on data from business accounts held at JPMorgan Chase, the nation’s largest bank and an important backer of small-business education programs here in Detroit.
To boil down a mountain of data, the study reports that holding a cash buffer remains crucial to survival for a small business. Also critical is understanding the pattern of cash flow — money in versus money out.
Some types of businesses see more volatile cash flow patterns than others. Case in point: Restaurants. The life expectancy of a restaurant among the JPMorgan Chase account holders is just 3.7 years, the shortest of 12 industries studied.
Least life expectancy
Restaurants can be victimized by the double whammy of unexpected expenses and uneven revenues. Expenses can vary because they’re buying supplies all the time at often rapidly changing prices; and revenues fluctuate according to the day or the season. That pinches the amount of cash they have on hand, as evidenced by the amounts in their bank accounts, Wheat said.