Land subdivision and funeral businesses may not be the sexiest small-business ideas when compared to, let’s say, a web startup or a local coffee shop. But private companies in these fields tend to have the healthiest cash flow, according to new data from Sageworks, a Raleigh, N.C.-based financial data company.
For entrepreneurs seeking new ventures, businesses with a track record of stability and solvency may be a good place to start. Sageworks used highest average current ratios to generate a ranking of 12 business types with healthy cash flow for the year ending Aug. 31, 2014.
Cash flow is a leading indicator of financial strength because if a company has sufficient cash on hand, it will likely meet its short-term obligations — like accounts receivables and employee salaries — on time.
Sageworks analyst Jenna Weaver says the businesses listed “have the ability to pay their bills and they tend to, on average, have positive cash flow.” She adds that while these businesses aren’t necessarily fun or flashy, understanding why certain industries or business models are more inclined toward solvency than others is useful for any entrepreneur.
Land-subdivision companies divide land into plots to make selling the property easier. Weaver explains that its top ranking may reflect the strong real estate/construction market recovery since 2009.
The rest of the results show themes: half of the list represented the retail sector. While giants like Walmart are known to operate with a low current ratio because of their ability to turn inventory quickly into cash, small private retailers may have difficulty predicting consumer behavior and may therefore stockpile inventory to meet any unexpected consumer demand. Weaver explains that the ability for these smaller establishments to then turn these inventory levels into receivables, and receivables into cash plays a big role. Also, she says a third of the industries on the list are service-related businesses, which usually have lower or no inventory needs.
While every industry operates on different business cycles and models, entrepreneurs brainstorming on stable business ideas should always keep solvency in mind.
“Often, when businesses fail, they fail because of their inability to manage these ratios and generate positive cash flow,” Weaver says.
It’s important to note that a current ratio that is too high is not always ideal. A company wants to keep enough cash or liquid assets available to be able to meet its short term debts, but it doesn’t want to sit on too much cash or inventory, so that its assets are still being productive for the business.