You might not be in business for the money - at least, not entirely. But cash - or a lack of it - can sure as hell finish you off, if you don’t manage it correctly.
Ask any seasoned entrepreneur, and they’ll tell you that cash flow is THE most important part of keeping your business afloat in the early years. Even more so when you’re looking to scale.
Growing your customer-base and revenues usually means spending on technology, people and marketing, in the hope (and necessity) of seeing the returns later. And if you’re not on top of your cash flow, that can leave you seriously exposed.
So, make sure you’re familiar with these big cash flow killers, before it’s too late.
Fast growth is what most entrepreneurs dream of, but uncontrolled growth can leave your business on the brink of failure.
On-boarding lots of new customers feels great, but if you can’t get the money in fast enough to cover the higher overheads, then you’re going to be in trouble.
It’s at this point that many business owners seek out funding, providing a cash injection for the short-term. Before you do though, think carefully about where this funding will come from and how it will impact your cash flow in the long-run.
For example, bank finance means you’re committed to set monthly repayments almost immediately, which means a monthly hit on your bank account. Whereas, with investment from angel investors or VCs, you won’t have regular monthly payments, but it does mean sacrificing equity in your business, and more time seeking the right partners upfront.
For more on the options, take a look at our blog on Start-up funding: what happens when.
Late payments and long payment terms
Late paying customers are the enemy of healthy cash flow, as if you don’t have your dosh before having to pay your bills, then you’re going to fall into the red pretty quickly. But there are some simple tricks to manage this.
Consider ways you can incentivise your customers to pay faster, by offering discounts for early payment, or asking for deposits upon order.
Invoice factoring is one way of achieving the same end but through an intermediary, such as MarketInvoice where they’ll loan you the money for a fee, then collect from your customer when they settle.
Agreeing watertight T&Cs upfront is also vital, along with systems for invoicing and chasing payments promptly.
On the other side of the equation, take advantage of the full payment terms of your suppliers and build strong relationships, in case you ever need to negotiate more flexibility in the future.
The ostrich approach
The ‘ignore it until it goes away’ approach is the quickest route to cash flow ruin, so face your fears with frequent and honest tracking and forecasting of what’s going in and out.
A map of your projected cash flow should be central to your business plan, using your targets as a starting point and working back from there.
Understanding your key outgoings against projected revenues enables you to highlight where you might get caught out and ensure you have sufficient funds to work with at every stage. Your forecast should then be broken down on an annual basis, so you have a business plan, a budget and forecast of what each year is going to look like, on a month-by-month basis.
All businesses go through busy and quiet periods, but this is more extreme if you run a seasonal business.
The key is knowing what to expect so you can plan for it, and that means looking over past years’ trading patterns and incorporating these in your forecast for the months and years ahead.
If your business is new then see what other data you can get hold of, for example from market insights or competitor figures from Companies House. Then once you have a good picture of the rhythms of your business or sector, develop strategies to mitigate the cash flow risk.
For example, negotiate seasonal payment schedules with suppliers, reduce costs during the off-period, or explore additional revenue streams during those weeks or months when your main business is on the go-slow.
Running on fumes
Business can be unpredictable and all the forecasting in the world can’t prepare you for everything. That’s where a cash buffer is your best friend.
It might sound ambitious for a start-up, but aim to always have a reserve of cash, to see you through any unexpected events, and help you to take advantage of business opportunities that come along.
If you’re not in a position to build up a cash reserve organically, then factor this in when you’re raising investment or borrowing from the bank. Having an additional nest egg gives you the freedom to respond to changing market conditions and your business a greater chance of success.