Start-up cashflow can cause operational disruption and be the cause of a new business failing. These considerations are designed to help your business recover.
It's a scary moment when your start-up cashflow isn't right, but take a deep breath, it's not uncommon in the early years of a business, and it certainly doesn't mean your venture is over. Difficulties often stem from growing too fast, slow payments from customers, or costs and expenses being higher than anticipated.
Here is some advice and immediate actions you can take to put a plan in place for a quick recovery.
Immediate steps to take
1. Start cost-cutting
Your first move should be to focus on cutting costs. A quick exercise can help you identify every expense stream:
- List everything: Go through your books and write down every single thing you spend money on
- Decide what's essential: Determine if each item is genuine requirement for your business operations
- Cut the rest: If an expense isn't essential and you can manage without it, immediately investigate how you can cut it.
You might need to be ruthless initially, but the goal is for this to be a temporary fix until your cashflow stabilises.
2. Get paid sooner
Slow customer payments are a common problem. You need to ensure you're getting paid on time and that your payment due dates align with your outgoings. To ease this issue, you can:
- Automate reminders: Set up automatic reminders for all your invoices
- Encourage direct debit: Try to encourage customers or clients to pay using Direct Debit
- Adjust your terms: Shorten your payment terms so you get paid quicker.
3. Talk to your bank
Don't hesitate to reach out to your banker. They are there to help you work through cashflow difficulties and might be able to offer an immediate solution. Just be aware that this can sometimes be a costly method, so you might want to seek advice elsewhere too.
Longer-term fixes for financial stability
Once the immediate crisis is under control, you need to look ahead and plan strategically.
1. Create clear cashflow forecasts
Take the time to look ahead and predict your upcoming expenses for the year.
If you have been operating for more than a year, use your previous profit and loss statements, balance sheets, and cashflow reports to help you forecast.
Continue to cut anything non-essential until your cashflow becomes more reliable.
2. Address long-term operating costs
If you've been growing too quickly, it puts a strain on cashflow because expenses pile up before you see the return on that investment. Meeting high demand requires investing in more people, systems, and marketing, which don't always give an immediate return. You can cut long-term costs by getting strategic:
• Look at automation: Adopt automation where possible
• Optimise: Review licenses and look at supplier invoices and costs
• Focus staff: Increase employee versatility through training or outsource non-essential tasks to let your team focus on business development.
3. Review your pricing
Many entrepreneurs are hesitant to increase prices for fear of losing customers. The advice here is to do your research and position your value appropriately. If you decide to raise prices, give customers plenty of notice, be gracious, and continue adding value to your offering.
4. Build a cash reserve
This is a goal for the future, as it's difficult to put cash aside while you're currently struggling. Once you've recovered, a healthy cash reserve of approximately three to six months of operating expenses will allow you to handle the future fluctuations in revenue.
5. Diversify your customer base
If all your revenue is dependent on only one or two large customers, your business is in a risky position. Diversifying your client base across large, medium, and small customers means you'll recover much faster if you lose one.
6. Seek emergency funding
There are multiple ways to address cashflow difficulties through various providers. You can start by asking your bank, your accountant, or someone you trust in your network who deals with financing.
I hope these considerations are never called upon! But I also hope they will help be more prepared for your first years in business.
Mike.
Mike Foster
The Entrepreneurs Mentor
