Cashflow is The Lifeblood of Your Business, You Must Keep It Flowing

We did promise that these pages would be honest and clear about the real dangers to your fledgling business, so there is no better place to start than the need for cashflow.

Let me be clear on this. Get the cashflow wrong, and you will soon have major financial problems. Get it very wrong and you will be out of business very quickly.

If there’s one rule every new business owner must understand from day one, it’s this:

“Cashflow is everything.”

Even a profitable business can collapse very quickly without enough cash to keep it running. In fact, we see businesses with plenty of orders that still end up insolvent because of cashflow problems.

Your first 12 months are frankly delicate when it comes to finances. You need the money to pay staff, suppliers, marketing, premises, running costs, and, of course, yourself and the other directors.

Most of the businesses we see that are looking at insolvency have had the same repeated challenges and, sadly, often fallen into the same traps. There are many of those traps, so these are just a few of the more common ones.

1. Forecast, Don’t Guess

Cashflow forecasting is there to help you anticipate what’s coming in and going out. That is the purpose, so clearly you must project your income and expenses weekly or at least monthly. Factor in payment terms, VAT, and one-off costs like insurance or equipment purchases.

Now run some scenarios. Do some ‘what would happen if’ kind of forecasting, so you know the variables. If you rely on a small number of large customers, what happens if one should vanish? What happens if a supplier goes out of business? What effect would a jump in inflation have or a rise in fuel costs?

We’re not telling you to spend all day worrying about every possible thing that could go wrong financially, but we cannot stress strongly enough that knowing your potential cashflow inside out is the best way to avoid problems in your first year.

Tip: Update your forecast regularly, at least once a month, and run scenario planning to avoid nasty surprises.

2. Get Paid Promptly

Late payments are the silent killer for a business. Just as you can go out of business with a full order book, you can do the same with completed and delivered orders. Essentially, an unpaid invoice that goes over the agreed terms is just you lending money to your buyers.

Be clear on your payment terms before you start work, invoice immediately upon completion, and then, just as importantly, follow up consistently. In your first year, when your income streams are likely to be building erratically, maybe consider offering small discounts for early payments or similar incentives. Certainly, consider digital tools to monitor your finances.

Tip: Don’t be afraid to chase overdue invoices, it’s your right to be paid. Never fall into the ‘trust’ trap. It’s not a matter of whether the customer is someone you’ve known in the past, or someone you trust to pay eventually… treat them the same as everyone else.

3. Control Your Outgoings

During the first year, every pound counts. Separate “must-haves” from “nice-to-haves”. Focus your spending on revenue-generating essentials and know what they are. Areas like marketing, training, and compliance may seem less urgent than other costs, but miss them at your peril. Hold back on expensive branding, office space, or software you don’t yet need, and focus on making sure your clients and customers know you are there, make sure that you sell your products, that you pay your bills, and that you meet your legal obligations. A nice new set of furniture for the office is all well and good, but a marketing campaign that brings in revenue, or training your team to be more productive, is going to be a lot more important in the first year.

Tip: Keep things lean at all times. Spend where you need to spend, not where you want to spend. They can be very different things.

4. Build a Cash Cushion

Unexpected costs always arise. If you have no buffer in your cashflow then something as common as a broken laptop or a delayed payment can be a huge problem. Aim to build to a position of having at least one month’s worth of expenses on hand as a reserve fund. This buffer helps you keep operating when income slows or emergencies hit.

On another note, when it comes to having reserves in case of cashflow issues, there is a sort of two-column thinking we often see. Directors will usually look at things in terms of essential costs and non-essential costs when it comes to allocating finances if things get tight. There is a strange tendency for new directors in particular, though, to see their own salary in the wrong column. You need money, you need to pay yourself, so put your own salary (or at least a basic survival level one) in the essential column.

Tip: Consider methods such as saving a fixed percentage of each payment received into a separate “rainy day” account.

5. Beware the Common Traps

New businesses often fall into predictable traps. A few of these include:

• Overtrading - growing too fast without the cash to fund it.
• Under-pricing – Getting business by cutting profit to such an extent that it isn’t worth trading.
• Relying too heavily on a single client – It’s a cliché, but all your eggs in one basket means no eggs if there is an issue with that basket.
• Over reliance on credit – Using credit, such as loans, is fine as long as it is for the right purposes. If you find yourself extending your credit to keep the business afloat, stop, take stock, and think about whether you are doing the right thing!

There are a few others, and we will be covering them in the coming months in our blogs. The bottom line is that each of the above is more than capable of destroying your cash position quickly, even overnight in some cases.

Tip: Grow steadily, know your margins, and spread your client base early.

During the first 12 months, you must know your cashflow, enforce your terms, make sure you keep the money coming in from the work you do and, as soon as possible, prepare for a lean month with a buffer of cash in the bank.

Download our 'Surviving Your First Year' guide here.

If you want to know more about some of the problems that businesses can face or have specific questions/think you may be looking at insolvency, try our ‘help for directors’ section here.