When we think about the important attributes for a new business, factors such as profile, investability, business model and product all come to mind. However, one of the key elements for any new company that wants to be long-term successful is cash flow. Successful cash flow management will enable your business to cash in on opportunities, develop as an entity and establish a market position. Poor cash flow management is one of the most common reasons for business failure (many as 82% of start-ups and small businesses fail as a result of cash-flow management.). These are some of the key considerations to bear in mind.
Be realistic about your sales volumes
To a certain extent you need to be impractically optimistic as an entrepreneur in order to get your venture off the ground – but not when it comes to sales predictions. Sales forecasting needs to be entirely objective and based on as many tangible, predictable factors as you can muster. Quantitative forecasting methods can help you to predict future performance on the basis of past data – from your business and others in the industry – and a grounded, realistic perception of potential will stand you in great stead when it comes to your cash flow.
“You have to speculate to accumulate”
No, as a small business or startup owner, you don’t. If you’re spending cash without a good reason during these early phases then you’re in danger of compromising your cash flow. There are many advisors and developers out there who will charge you way above a realistic value for products and services that you may not even need. Be cautious with every penny that you spend, beware of speculative spending (i.e. costs that won’t tangibly benefit your business right now, or in the near future), and be very choosy about where you want to allocate the cash that you do have.
Tracking and budgeting are necessary evils
Cash flow conditions can change in an instant and the most successful start-ups and small businesses are those that can respond. This means keeping a close eye on cash flow, tracking it on a daily basis and setting realistic cash flow budgets. Where possible, it’s also a good idea to create a cash cushion that will help you to absorb any expenses or issues that you just don’t see coming. The ebb and flow of payments is brand new when you’re just starting out and it’s easy to find yourself with an invoice you can’t pay or demand you don’t have the resources to meet. The combination of tracking, budgeting and a cash reserve will give you the best possible chance of getting this right.