Failure rates among start-ups are high, not just in the UK but also in America and other key business centres all over the world. There are many reasons cited as the cause of these failures, from a lack of business focus, to misunderstanding tax liabilities and not having insurance for the tough times. However, the reason that tops them all is cash flow. Every startup that falls down on the cash flow front is headed for the skids – almost without exception.
What is cash flow?
Cash flow is, at its most basic, the availability of cash in your business. Without strong cash flow a company can’t survive, can’t meet its obligations and – crucially – can’t grow. Cash flow is made up of the cash payments (and cash equivalents) that are paid into, and out of, a business. Companies can have vast volumes of assets – such as stock or property – however, if there isn’t enough actual cash in the business to pay debts etc that business could still become insolvent. Ensuring cash flow is healthy is fundamental for a start-up – but also one of the most difficult skills for those just beginning in business.
How does cash flow affect start-up success?
The issue most start-ups face is inexperience in cash management. Plus, there may be a lot of up front expense for a new business and most start-ups are bootstrapped, meaning that there’s a very small amount of cash from which to meet those expenses. It takes a while to establish a customer base so income can be minimal and, as payments need to be made to cover liabilities, cash flow can be squeezed to a minimum. If it dries up then the business folds.
Managing cash flow for start-ups
While every business is different, some fundamentals apply to everyone.
Have a back-up source of income. You may need an overdraft, crowdfunding or investment capital to provide back-up to your cash flow in the first year or so.
Track your cash flow. Put a system in place that allows you to see what is owed to you and what you owe, including when each of these payments is due.
Take account of seasonal fluctuations. Is your business affected by the weather? Do your products sell well during holiday periods? Make sure you account for the likely changes to your cash flow over time.
Create cash flow analysis. Start to understand what happens to your cash flow when certain events occur, from paying a bill, to buying an asset such as stock.
Get some professional help. A good accountant can provide proper training and help you get set up with systems and documents that will give you the best possible chance of avoiding cash flow failure.