Cash flow is the lifeblood of any business. It fuels growth and ensures a company can meet its liabilities. Careful cash flow management is particularly important for start-ups, where there is often little margin for error.
Unfortunately, many start-ups have been killed off by poor cash flow – but planning ahead can make sure yours doesn’t suffer the same fate. Here are seven of the most common cash flow issues for new businesses.
Late-paying customers
About 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 the cash being in the bank on time.
Profit – but no cash
Profitable start-ups can be very cash-poor and this represents a real problem. You might be making a six-figure profit – but if that doesn’t translate into cash, then you can’t use it.
Be wary of reinvesting a large proportion of profits back into the business. This money will be removed from your cash flow, which could leave you without the liquidity to pay your bills.
Seasonal disruption
When you’re creating a cash flow forecast, it’s easy to forget about the real world.
You should analyse market trends in detail. Your customer base could cool off during the summer or hit 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. Reducing your workforce during quieter times could be the solution.
Relying on your revenue
Nothing counts as revenue until you can see it in the bank. Many start-ups are caught out by relaxing after a positive monthly P&L statement and balanced budget.
Until it’s in the bank, you can’t pay your bills.
The shock of growth
If your business suddenly takes off, its cash flow needs to keep up to remain sustainable.
If you suddenly get a huge order for stock, production costs will usually have to be met up front. The revenue may not arrive for another few months. Where will your cash come from in the meantime?
Sales dropping away
Forecasts are just forecasts. Some sales simply won’t materialise. Beware of relying on these riskier sales projections, which could leave your business without the income it needs to stay solvent.
There are many factors that can impact on sales – from marketing activity to product returns. Each factor needs to be considered when you’re predicting income.
Losing control of money
Once your business is up and running, it’s easy to get overwhelmed. If you don’t fully understand how to manage your cash flow, then you can lose control.
From the start, you should have systems in place to monitor and manage the cash flow of your business. It’s also useful to have a professional’s advice in these early stages.
