To Reduce Your Risk Of Bakruptcy As An SME, Focus On Increasing Cash Flow, Not Sales
TO REDUCE YOUR RISK OF BANKRUPTCY AS AN SME, FOCUS ON INCREASING CASH FLOW, NOT SALES
There’s a sales frenzy sweeping across the globe.
Companies are competing fiercely in sales figures.
While this sales obsession might be a priority for large enterprises, it’s highly likely to lead SMEs down a path to bankruptcy.
Here’s why:
Your financial statement, the balance sheet, shows how much wealth your business has created for you. On your balance sheet, you can see exactly how much wealth your business has generated to date and whether this wealth comes from your equity or external resources.
Your income statement, with gross sales as its starting point, is the output of your balance sheet. The better you utilize the assets on your balance sheet with bulletproof strategies, sound investments, and efficiency, the more your sales figures will grow in your income statement. Your sales figures reflect how well you’ve managed the assets on your balance sheet and their financiers—that is, how well you’ve managed your business. However, a temporary rise in sales over a year or two doesn’t guarantee your long-term presence in the business world. Sustained growth in sales over the years, with costs and expenses increasing at a slower rate than sales—scalability—is the true indicator of lasting success.
This is where the significant difference between large enterprises and SMEs lies: the size of their cash pools.
What makes a business "large," according to KOSGEB's criteria at the time of writing, is an annual net sales figure of 500 million TL or more. Reaching this sales figure didn’t happen overnight; it’s a target achieved over 8–10 years by correctly implementing a scaling model. A large enterprise with annual net sales of 500 million TL or more has a much stronger position to scale its free cash flow. It can negotiate bulk purchase discounts from suppliers that an SME cannot, attract talented professionals as it transitions into an employer brand, and allocate substantial budgets to marketing and advertising. In short, it has a cash pool that allows it to grow annual sales to 1 billion TL and then 2 billion TL. However, SMEs lack this massive cash pool. The primary obstacle tying SMEs’ hands in scaling is their relatively shallow cash pool compared to large enterprises.
At this point, the biggest strategic mistake leading SMEs to bankruptcy is focusing solely on sales. “Sell no matter what.” Offer deep discounts to sell. Make unreasonable concessions to customers to capture market share and sell. As an SME, measuring your business’s success solely by sales figures and selling just for the sake of it—without profit—will pose the greatest risk of bankruptcy for your small-scale business.
From this perspective, SME owners should focus not only on sales but also on the year-over-year growth of their free cash flow during the establishment and growth phases of their business. Sales are indeed the starting point for generating free cash flow. However, you must regularly track the costs, expenses, and cash inflows/outflows incurred to make those sales. Ensure that in your pursuit of sales, you don’t burn through your cash and steer toward bankruptcy.
As an SME owner, your primary responsibility is to protect and grow your free cash flow as if it were your most precious asset. By doing this consistently for 8–10 years following the establishment of your business, not only will you avoid bankruptcy, but you will also grow your cash pool, enabling you to embark on desired new investments, take that dream year-long world tour, and secure your children’s future.
To your victory in the business world,
Business Coach for CASH
Your Business Coaching Team