If your start-up cashflow is causing you problems, here are a few things for you to consider… First of all – cashflow problems in your early years of running a business aren’t uncommon, and it certainly doesn’t spell the end of your venture. Have a look at some of the following considerations and I hope they will help you put a plan in place to quickly recover.
Common reasons for start-up cashflow problems
A lot of the cashflow difficulties come down to growing too fast to sustain working capital, slow customer payments and higher than expected costs/expenses.
In my blog, ‘How Do I Ensure I Will Get Paid?’, I look at ways to mitigate that particular problem, and in, ‘What Costs Are Considered Essential?’ I talk about the difference between an expense and a cost, and how to decide what you can’t do without to run your business. As for growing too fast, I’ll address that lower down this blog…
The real reason many businesses fail is a lack of market demand for their product or service. If the offering is poorly positioned or unwanted, sales will not materialise, meaning there is no profit to generate cash flow.
Immediate actions to take when your start-up is running out of cash
Focus on cutting costs
Have you identified every expense stream? A quick exercise you can do:
- Look at your books and write a list of everything you spend money on
- Decide whether it’s essential
- If it isn’t, and you could probably do without it – investigate how you can cut it.
You might have to be a bit ruthless to begin with, but hopefully this won’t be the case for too long, and you can soon start considering which expenses you can re-introduce. Just be mindful when
cutting costs to ensure you don’t stifle your growth opportunity.
Look at your customer payments
Are your customers paying you on time? Don’t slip into a place where you become the bank or
lender to your customer. A good customer is one that pays! Have you set the payment due by date appropriately to cover your outgoings? To ease this problem you could:
- Set automatic reminders on your invoices
- Encourage customers/clients to pay by Direct Debit
- Consider moving your outgoing payments to later in the month
- Consider moving your pay-by date earlier in the month
- Shorten your payment terms so that you get paid sooner
- Get on the phone!
Talk to your bank
Your banker is there to help you navigate cashflow difficulties with a potentially immediate solution. I will say though, that can sometimes be a costly method of remedying cashflow difficulties, and you may wish to take advice from elsewhere too.
What else can you do?
Create rigid cashflow forecasts
Once you’ve dealt with the immediate problem, look ahead in the year and predict what expenses are coming up. Again, cut what isn’t essential until you feel your cashflow is more reliable. If this isn’t your first year in business, you can use your profit and loss statements, balance sheets and cashflow reports to help.
Look at long-term operating costs
Have you grown too quickly? This puts a strain on cashflow because your expenses are racking up before you see the return on your investment. Meeting higher demand means investing in more people, systems and marketing, which don’t typically provide an immediate return on investment.
Long-term operating costs could be cut by getting strategic: adopting automation, optimising licenses, increasing employee versatility through training, outsourcing non-essential tasks to focus on business development, looking at supplier invoices/costs. I’m sure there’s more you can look into for your particular scenario as well and I’d be happy to help you identify areas within your business to focus on.
Look at your pricing
This is an interesting one – Lots of entrepreneurs and start-up owners are reluctant to increase their prices fearing they will lose customers. I say, do your research and position your value appropriately. If you do that, give them plenty of notice, be gracious and continue to add value to your offering, you should be able to increase your prices without concern.
Build a cash reserve
This is longer-term planning because whilst you’re experiencing cashflow difficulties you will find it very difficult to put any cash aside. However, once you’ve recovered, I recommend somewhere between three and six months of operating expenses would create a healthy cash reserve to allow for the ebb and flow of revenue in the future.
Diversify your customer base
Your business could be making a very tidy profit, but if all your revenue is reliant on one or two big customers, it’s a risky position to be in. If you can diversify the client base across large, medium and small customers, you’ll recover much quicker if you lose one.
Seek emergency funding
I’m not qualified to advise on what type of emergency funding you could utilise, but I do know that there are multiple ways you can address cashflow difficulties, from multiple providers. You could start by asking your bank, accountant, or someone you trust in your network who deals with financing.
Seek professional help
Of course, I am going to suggest that a business mentor like me can help you avoid the pitfalls of cashflow, but this is out of genuine desire to help startups survive and become established businesses.
Professional help doesn’t need to be an added cost; in fact many people believe it to be a good investment in the same way they view networking and marketing. If however, you are experiencing cashflow difficulties, I would like to offer you a complimentary mentor call, with no obligation to sign up for anything, and there are also lots of free business advice resources on my website you can help yourself to.
My latest book, The Financial Times Guide to Starting a Business, also contains advice on cashflow and is on sale now, from Amazon or Waterstones.