Even the most visionary business can be derailed by cash flow problems. In fact, a recent survey found that a staggering 82% of start-ups and SMEs fail due to inadequate cash flow management. So it’s vital that you know some of the most common pitfalls – and how to avoid them.
1 Overspending too early.
This sounds obvious, but you’d be surprised how many young businesses do it. Whilst it does indeed take money to make money, the first few months of a new business is not the time to be investing wildly in anticipated growth. Of course, there are plenty of costs that you should meet, but there will also be plenty of consultants and service providers who will be ready to sell you expensive snake oil. Make sure you carefully consider the potential benefit of every pound of extra expenditure.
2 Overestimating future sales.
Every entrepreneur starts a new business with a high level of optimism – there would be no point otherwise. But if the business is to succeed, it’s vital that this optimism is tempered with objectivity. To forecast your sales, you should look at historical evidence and real numbers for both your business and the broader sector. A good business mentor within your industry can help you project future sales with a greater degree of accuracy, enabling you to make sound judgments and create projections that will be borne out.
3 Permitting late payments.
Nobody likes chasing customers for money, but being too laid-back when it comes to credit control can be disastrous. If you don’t ensure that invoices are paid within a reasonable timeframe, you could find yourself faced with a dangerous cash flow situation. The first step is to agree clear policies for payment, possibly backed by a discount for early payment and financial penalties for late payers. Internally, you should create a timeline for dealing with payments, setting out the dates on which customers will be invoiced and when phone calls will be made and letters sent out as reminders.
4 Failing to create a cash flow budget.
Even if you maintain effective credit control and carefully manage your expenditure, you could find yourself in trouble if you don’t track your daily cash flow. By carefully examining past data, you will be able to anticipate future cash flow, factoring in seasonal variations – for many businesses, the period around Christmas is especially tight as sales may increase but payments may be slower due to customers closing down their accounts departments for a week or more.
5 Not saving for a rainy day.
Whilst it’s important to keep investing in your business, there are also times when it’s crucial to have cash on hand. If you have solid cash reserves, late payments or the need to purchase stock to satisfy a new business win can be taken in your stride. However, if your credit balance is zero then it can be much harder to recover from a sudden setback. Make sure you prepare for the bad times during the good times.
6 Failing to consider alternative lenders.
When you hit a cash flow blip, an overdraft can be a vital asset. However, since stricter capital controls were introduced in 2009 banks have been removing small business overdrafts at the rate of £5.7 million a day. Where banks won’t help, alternative lenders often will, and apply quite different criteria when making decisions. Take out an emergency loan and the funds can be in your account within 24 hours, whilst with asset-based finance you can borrow against the value of your premises, plant or equipment. Alternatively, invoice factoring or discounting allows you to borrow up to 85% of the value of your invoices the moment you issue them, with repayment being made as soon as your customers pay you.
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