Startups series part 1
Every business that exists today, from small operations of just a few people to multinational corporations, once began as a start-up. Being a new business owner can be challenging – from making sure your business plan is right, to understanding your market, it’s essential that you do as much planning as possible before launching. One of the things that often gets neglected, however – and to the company’s detriment – is having a robust plan to manage cash flow.
Cash flow is easily one of the most important elements in running a business. Without it, you can’t pay suppliers and expenses on time, which can, in turn, lead to a negative credit rating or a poor reputation – none of which help you to succeed. On the other hand, when you manage your cash flow well, you will more easily be able to maintain good supplier relationships, manage expenses, and even apply for finance or credit when needed.
We’ve put together three tips on how to manage your cash flow well, right from the start.
Get your invoicing and collections processes organised
We’ve seen far too many startups get their business going without any idea of how they will manage invoicing and collections. Some will even have a different agreement with virtually every client and supplier, making admin a complete nightmare. Having a clearly defined invoicing protocol makes it considerably easier to manage, and to keep track of overdue payments.
It is important to stick to this protocol and to be consistent. This not only makes your admin much simpler, but it also helps you develop good relationships with both your clients and suppliers. If a supplier knows that they can rely on payment within, for example, 30 days of invoicing, they will trust you and be happy to provide products or services. If clients understand they will receive invoices, for example, on the 5th of every month, they can plan their own payments more effectively and are less likely to default. Which leads us to our next point:
Manage your credit and debt well
No business, not even retail, operates on a cash-only basis. You will, at some point, need to extend your credit facilities or have agreements for long-term payments, and you will also likely need to apply for your own loans or overdrafts. It is absolutely critical that you handle your debt and credit well, especially if you wish to maintain a good cash flow position.
If you are offering credit, or have pay-off agreements – such as lay-bye, retainers, etc – make sure you have a robust collections process in place to avoid defaults. Whether you have in-house debtors and creditors department, or outsource it to a payment management company, ensure your systems are strong, consistent and reliable.
If you have any business loans or overdraft facilities, prioritise these, and make sure you are always able to meet your debt commitments. Failure to pay off your debt on time can result in anything from a black mark on your credit record, to losing these facilities entirely. Manage your own debt with diligence and care, and you will be in a better position to apply for additional loans or facilities when you want to grow your business. That said, only ever apply for a loan or credit line if you are certain you will be able to meet the commitments and never take a loan from anyone other than an authorised financial services provider or bank.
Start-up capital is vital
One of the worst traps a business can fall into is using customer payments to fund their purchases. For example, if a construction company receives advance payment, and uses that to purchase materials, it can result in payments spiralling out of control, and unhappy customers. Always make sure you have enough capital to complete any projects you embark on and don’t rely on customer payments to make sure you can deliver. What if a customer pays late, and you can’t finish their work? You may find yourself in a Catch-22 situation, with zero cash flow, and an unhappy client.
It always pays to have a separate – preferably interest-bearing – contingency fund that can be used for business-critical situations. This way, if you find your business in a poor cash flow position, you have a back-up you can rely on to keep operations running smoothly. Our recommendation is to have at least three to six months’ worth of operating expenses ring-fenced in such an investment account. This should be the bare minimum, but if you have at least this, you can ensure salaries, rent, utilities and so on are covered, even if you have a setback.
Final thoughts
A few other things to remember are: don’t make any purchases that aren’t necessary for your business to operate well. An expensive, fancy coffee machine that dispenses several different kinds of coffee and tea is wonderful, but is it necessary if you have only three employees and they work remotely half of the time? Weigh up the expense of any purchases to make sure they are not harmful to your business, and avoid frivolous purchases until you are 100% certain the business can handle the expense.
If your business needs help getting invoicing and debit order collection right, get in touch with us today.