We’ve all come across that statistic that says most businesses will fail within their first one to two years of existence. The reason? They run out of cash.There are many businesses that will focus on their income statements and not really keep a close eye on cash flow. You could be running a highly profitable company with healthy margins, but how much cash you have is what really matters in ensuring continuity. If your customers are not paying on time, you could quickly find yourself unable to operate your business whether or not it is profitable on paper. So how should an SME/start-up plan and manage its cash flow so that it is able to ride out the storm? Alex Light, co-founder of start-up Styck App sheds some light on the matter.
As a start-up owner, why is cash flow so crucial in the survival of your business?
Cash flow is king at the start of any business. It dictates how long you can survive without having to obtain external funding. Before you make any decisions when starting your business, you have to understand how much cash you have and how long it will last you.
How should business owners plan ahead as far as cash flow is concerned?
The reality is that you cannot truly know exactly how much cash you will need until you get into the market. If you are going to introduce a product, create a production plan so that you don’t end up being in a situation where the demand for your product far exceeds your ability to produce it. Also, it is important to set goals and targets and work back from there. For example, ask yourself “How much revenue do I have to generate by month 3 and how much do I have to spend to get there?” When you quantify your goals, you can then gauge your cash needs. [Related: Guide to bank accounts for SME’s | Should an SME take a secured loan or overdraft?]
What are some of the mistakes that business owners make that lead to cash flow issues?
- Often business owners will launch a product/service without testing the market
As a business owner, you can really end up spending a lot of money at the early stages on product development, marketing and advertising and unless you are heavily funded, you can run down a large sum of money on an idea that the market may reject. Don’t make the mistake of using your own bias to guess what customers want. Instead, you could consider creating a minimum viable product. That is a sample product that you can test. Then collect feedback and based on this information, you can develop your product further.
Poor control over customer payments can get you into cash flow trouble
Another mistake that business owners make is to underestimate the impact of timely receivables. Cash flow is the lifeline of the business and if you don’t have a tight control on payments from your customers, you could end up in trouble especially as credit terms can extend to 90 days. A potential solution to this issue is to employ a credit controller who can keep on top of this.
Just remember that your relationships with your customers really do make a difference in this area. A common mistake is to follow the cash rather than to focus on creating value relationships. The more value you bring to the market, the easier it will be to leverage those relationships to get your payments on time.
Cash flow is essential for any company. In your view, which types of businesses are more in need of steady cash flow?
Any business that holds physical goods or has a high percentage of fixed costs will require a lot of cash. Basically, if you are the holder of inventory and you are trying to create demand, anything physical is going to start ploughing into your cash flow. A key thing that many start up owners sometimes forget is that inventory has an expiry date attached to it. Whether it is due to perishability, break-down or becoming obsolete, the longer your inventory stays with you, the harder it becomes to sell and the more difficult your cash flow becomes to manage. For example, you may have a warehouse full of skipping ropes – a product that has existed for a very long time. But there will always be someone out there who will create more developed or fashionable skipping ropes. So if you don’t sell your skipping ropes, you could end up being stuck with them! For digital businesses, holding inventory is not as relevant, but a substantial amount of money could end up being spent on advertising your website or app to develop traction to it. What you will need to do is to carefully select the third party support required to reach the right target audience for your business. Otherwise, again you could end up wasting your cash. [Related: Beyond banks: Where else to get your SME funding | Seven steps to setting up an SME business]
Any final tips on cash flow management?
Cash flow is not necessarily something to be fearful of – but something to optimise your business around. Seeing your money in action is the fun part of running your business and this is what you should focus on after you have determined your budget. Just remember to always keep a close eye on your cash flow!