The JPMorgan Chase Institute’s “Growth, Vitality, and Cash Flows: High-Frequency Evidence from 1 Million Small Businesses” report analyzed and identified seven cash flow patterns. These patterns relate to issues with cash flow management. Analysts defined a relationship between cash flow management and the business’ performance; they also noted that these patterns fluctuate as the small business moves through the business life cycle. The patterns are identified in the following ways, within two separate segments:
Segment #1: More Regular Patterns
- Regular Weekly: Not much deviation is seen in these companies, as they are usually standard in their revenue and expenses patterns.
- Regular Weekly + Financing: Same as regular weekly, with the addition of extra financing.
- Semi-Monthly Revenues: These companies take in large revenues bi-monthly and pay expenses weekly.
- Semi-Monthly + Financing: Same as semi-monthly, with the addition of extra financing.
Segment #2: Less Regular Patterns
- Erratic Timing: Timing of cash flow is irregular, but not volatile.
- Volatile Expenses: These companies experience volatile expenses yet more stable revenue. Usually, companies deal with volatile revenue and stable expenses.
- Sporadic Revenues: These companies are heavily financed to make up for sporadic revenue. Usually, these companies see revenue about every seven weeks and the amounts received are greatly varied.
New Small Businesses Adapt to Become Stable Over Time, or They Close
As new small businesses move through the business life cycle, their cash flow becomes more regular. However, those most at risk for closure are those who experience volatile expenses that are increasingly difficult to manage due to their unexpected nature. We see many of our most forward-thinking small business clients secure and hold more cash than necessary to ensure those volatile expenses are handled. Imperial Advance provides alternative financing and working capital solutions to clients in a wide range of industries, including Automotive Repair, Business Offices, Construction & Contractors, Dental Practices, Franchises, Grocery Stores, Gyms & Fitness, IT & Marketing, Landscaping, Liquor Stores, Medical Practices, Restaurants & Bars, Taxi & Limo Services, and Trucking & Logistics.
The Transition from Irregular Cash Flow to Stable Cash Flow is Managed Differently — Ultimately, Stable Firms Will Thrive While Dynamic Firms Are More Likely to Exit
If a company from any of the aforementioned segments can develop a way to stabilize their cash flows and expenses, they are more likely to make it than those who cannot figure it out. Irregularity is a given when a company is new; financed growth firms deal with irregular revenue, while organic growth firms face irregular timing for both expenses and revenue.
What Can Be Done for These Small Businesses?
Policymakers could positively impact the economic growth of small businesses by focusing on both segments, not just those businesses that are heavily in the financed growth category — which is typical in this situation. One suggestion is to identify and implement programs to support small businesses in figuring out how to manage irregular cash flow and provide exposure to a wider range of funding sources. These adjustments in policies and programming could effectively impact the broader economic growth.