Cash flow is the lifeblood of any business, fuelling growth and ensuring a company can meet its liabilities and avoid going under. Careful cash flow management is particularly important for start-ups where there is very little margin for error. Unfortunately, many start-ups have been killed off by poor cash flow, however, the surprises they faced provide plenty of learning opportunities for businesses coming up behind.
1. Late paying customers or clients
Only around half of companies will pay your invoices on time – that can come as a big surprise to a start-up. You may have a contract in place, an invoice issued and a payment date agreed but you still can’t rely on getting the cash in the bank on time.
2. Profit but no cash
Profitable start-ups can be very cash poor and this represents a real problem. You might be making six figures profit but if that doesn’t translate into cash (liquidity) then you can’t use it. For example, be wary of reinvesting a large proportion of profits back into the business as this will remove it from your cash flow and could leave you without the liquidity to pay your bills.
3. Seasonal disruption
When you’re creating a cash flow forecast it’s easy to forget that it needs to relate to what’s happening in the real world. Analyse market trends so that you’re not taken off guard by a drop in customers during the summer or a sudden peak around sale times like Black Friday. You need to match up expenses, such as inventory purchases and staffing costs, to avoid cash flow failure – for example, reducing workforce during quieter times.
4. Resting on your revenue
Nothing counts as revenue until you can see it in the bank. Many a start-up has been caught out by relaxing after a positive monthly P&L statement and balanced budget. Until it’s in the bank you can’t pay those bills.
5. The shock of growth
If your business suddenly takes off, cash flow needs to keep up or the growth won’t be sustainable. For example, if you suddenly get a huge order for stock, the costs of producing it will most likely have to be met up front. However, the revenue may not arrive for another few months – how will you cover this and where will your cash come from in the meantime?
6. Sales dropping away
Forecasts are just forecasts – be wary of relying on making sales that simply don’t materialise, leaving your business without the income it needs to stay solvent. Remember, too, that there are many factors that can impact on sales, from marketing activity to product returns – each one needs to be considered when you’re predicting income.
7. Loss of control
Once your business starts functioning, if you don’t have a good idea of how the cash flow should work, how to analyse it and what changes mean that it’s easy to get overwhelmed. That’s the point at which many lose perspective of where they are with cash flow until it’s too late and the liquidity has dried up. Make sure you have systems in place to monitor and manage cash flow early on – professional advice at the start of the business can be essential to its health, ongoing.