As startup or business founders, we're visionaries.
We're "do 'ers", hustlers, salespeople, we like to get s*** done and push hard every day to try and grow our business.
However, many entrepreneurs like you and me, while focusing on inspiring our team and growth of the business, we often find ourselves lacking one thing - understanding our finances and cashflow.
It doesn't mean we're hopeless at numbers and spreadsheets. It just means we often find ourselves sometimes unsure of our financial position up-to-date or in real-time, every day. However, what happens if you don't know the financials, cash flow, or numbers of your business?
In today's market, a vast majority of startups, unfortunately, fail to make past year one, and only a small portion of those who do so, survive through year three.
A study by the Australian Bureau of Statistics in 2018 revealed that 60% of small businesses cease operating within the first 3 years of starting the business.
This is due to various reasons, but what is the primary reason which stands out?
Poor cash flow is often seen as one of the primary reasons why startups, early-stage or growth-stage businesses nosedive not long after taking off.
Just think about that for a second. That's 60% of small businesses and startups that fail, with a large portion being contributed to cash flow issues. With the number of new businesses created in Australia, or let alone around the world each year, you can imagine the number of companies in your head that fail because of cash flow issues.
So how can you prevent your startup or small business being reluctant to cash flow issues?
Keeping a close eye on your finances and controlling what goes in and what goes out from your bank account is crucial for your business to not only survive but thrive.
Understanding the cash flow around your business or startup and implementing fresh, efficient best practices on how you deal with spending and receiving money may save you from a cash flow crisis and help you maintain stability in times of unexpected contingencies.
1. Having profit but not enough cash in the bank
It happens quite often, sales are going great and that your company is growing well, but how much cash do you have?
You can still be profitable without making any money.
Can you meet and pay our obligations on time?
For instance, as a high-level example, imagine that your startup provided services worth $50,000 in the first month of business; however, your client is late with a payment of 60 days.
You can still show $50,000 in sales/revenue for the month, but your expenses may have been $30,000 for the month. While the sale is recorded with $20,000 profit, you won't receive the cash for another two months.
Hence, this means over the next two months, you will go in a loss of $10,000.
Now, this is just one very basic example, however, what happens if you have multiple clients or have services that have margins like this?
Suddenly, you have a cash flow shortage that perhaps may not last for too long of a period of time but can still cause you much stress.
Additionally, as startup or business founders, you want to reinvest the revenue back into the growth of your business, right? Again, this is where the danger can lie if not understanding the ingoings and outgoings of the business, especially if you have many overheads and various moving parts.
Not only just understanding, but it's also coming up with a plan to ensure you combat situations like this.
So what are you supposed to do to prevent situations like shortages of cash?
The above example doesn't apply to all business owners or startup founders reading this article, but here is our tip which every business owner needs to consider.
Our tip: Sit down and rethink the terms of your invoices & review your cashflow projections. Establish a strategy that will prevent you from running a profitable business with long client payment terms.
If you are not in the position to wait 30 days to get your money, amend your payment terms so that your clients have to pay in two weeks at the most of when you released the invoice.
A great idea is to give your clients or users if they pay on time is by rewarding them. Offer them a discount in the future for future projects, discounts on their SaaS subscription, or even other rewards such as taking them out for dinner or an experience.
Additionally, consider payment plans which make sense for your business and also with the client.
2. Over investment on assets
It seems like a bit of a no-brainer, but it's funny the number of business owners I know who buy things that they don't really need.
Over investments occur in the business world fairly frequently. They are greatly based on the lack of sound judgment about what the business needs right at that given time.
At the beginning of a new business, as we know, it starts out all exciting, with great self-confidence and the natural 'high' you get from getting your first customer and office.
However, we can get carried away (I've also personally been guilty of this), of buying things we don't need at present.
What happens when unexpected contingencies come up?
This is where signing that 12-month lease for that extra office space may not look like the best decision right now. Or perhaps that new Mac Pro where you could go for a cheaper laptop.
Our tip: The main question to keep asking yourself is, "Is this going to help grow my business?".
Be mindful of how you spend on assets. You can fully equip your office, but do you need the fancy bookshelf, the expensive printer or the rustic computer desk which you may feel could 'impress' your clients?
Prepare a list of what is necessary to have for your business and what would be good to have in the near future, when you operate with more funds and are more stable.
Focus on reinvestment on things that will help you scale. Software tools which you can cancel anytime that can help you grow are the best early-stage investments you can make.
3. Having too much stock on hand
This issue may not apply to all startup founders or business owners, but if you're a front-facing store or eCommerce founder, balancing between having enough stock for sales, cost of inventory, and having enough cash in the bank is a delicate task.
I've never ran an e-Commerce or physical product store before. However, I do have a few friends that do this and continuously say this is a challenge.
There are plenty of reasons why your business might accumulate more inventory than it needs at the store or the warehouse.
While, for instance, buying in bulk has its advantages, purchasing too much stock can often lead to cash being tied up with products gathering dust if not sold. Or worse, the business sells perishable products like flowers or food.
For example, an e-commerce store that sells flowers, which is a perishable product (unless fake flowers), may need to order and store a large number of flowers for a key campaign period or a large campaign they may be running. However, not all the stock can be sold due to a lack of demand than anticipated for a particular sales period in a calendar year. You can only imagine what happens here.
So whilst you may not sell flowers online, how can you prevent excess stock you can't sell?
Our tip: Track down which of your products are selling the most and which are selling the least.
Try to do this on a monthly or quarterly basis, and then make your predictions of how much stock you need for the forthcoming period. That will help you avoid overproducing.
An ideal exercise is to run a scenario-based cash flow forecasting through an application like cenario, where you predict what happens if something goes right, or not. Additionally, this helps you prioritise all the other moving parts that happen in the business at a given time.
Bonus Tip: Proper management of your inventory list is also a must. Review your products regularly, so that you also make sure part of it doesn't become obsolete and unsellable. In this regard, you can also invest by setting an inventory management system that will help you figure out which are the products your clients like the best and keep making repeat purchases.
If the business you run at the time has lots of products that may grapple with the cash of the business, it's possible to seek a loan.
It's relatively easy to get a working capital loan in this present day, and there are plenty of options that can help your specific business.
You can read more about working capital loans here and find some potential providers that may be able to help.
4. Seasonal sales fluctuations
Seasonal highs and lows are another aspect of business that can affect your cash flow.
While everyone is happy when sales are going great during the peak periods, it's extra challenging in the weeks or months where sales volumes are low. Such fluctuations, whilst can be planned and anticipated, is never easy for any business owner.
It's crucial to understand the seasonal cycles of your business and plan in advance the various circumstances of what may or may not happen.
Even during peak periods, some business owners find it hard to meet the increased demand.
Even during the low-period months, it can be a challenge just to meet day-to-day operational costs.
For example, imagine running a small seaside resort. During the summer, the business will be booming, but what happens in the monsoon or winter periods?
The seaside resort can be agile and use their venue for other services when there aren't many tourists around. Perhaps they can host weddings or conferences at a cheaper rate.
While it may seem common sense reading this, how can the above apply in your context?
Our tip: Always have a cash reserve that you can access in case of disruption. You never know what can hit you or your business.
However, relying on your reserve funds solely is not always the right answer. Having access to flexible financing options, such as short-term business loans, may help you secure funding for peak or low periods of your business.
Bonus Tip: Be more creative in diversifying products or creating revenue streams that you can have during periods where sales for your primary products won't be as high.
5. Higher and faster growth than expected
We all want to scale our businesses quickly; however, don't rush to expand your business until the right infrastructure is put into place and, more importantly, with enough cash in the bank. Otherwise, you will find yourself in the red sooner than you realise.
Similarly to the issue of over-investing in assets - there's no point opening up that new store or expanding your inventory product line without making a profit or having enough cash in the bank.
Growing and expanding the business too quickly also means you need to increase the operations of the company, which naturally increases expenses very quickly.
The temptation is understanding if you're growing quickly and the demand is there. Why stop the momentum, right? Why not order the extra retail orders to keep pushing forward?
The issue is many business owners or people who work in small businesses, as an example, will order more products they want to sell, even with a lack of resources. It's because they're planning for their hyper-growth, which often means actual cash in the bank very quickly can become tight.
Many businesses simply don't plan or forecast correctly based on various scenarios for their business.
It seems like common sense, why do this? Yet the number of business owners who don't plan nor understand their finances and cash flow set themselves up for failure and can fail.
Event startups or scale-up's often fail even with millions raised due to not thinking about the various scenarios and planning accordingly.
So, how can you grow sensibly without finding yourself in the red?
Our tip: Using a cash flow forecast tool is recommended (unless you're an excel wizard).
Our tool Cenario can help businesses to forecast their finances with ease. You can try out various scenarios based on your real-time finances and plan for the short and long term future.
Having an affordable cash management tool like Cenario to assist you with keeping across your finances and cash flow can help alleviate the pressure and headaches in real-time.
It will ensure you are more aware of how much your expansion is going to cost, whether you really have the finances to sustain, and if you should be arranging extra borrowing of funds to help you grow.
6. Late payments by customers
We all love our users and our clients. I mean, they're the reason why your business is running.
However, our customers can also be the bain of our existence, especially when it comes to paying invoices on time.
According to Xero, 62% of small businesses have encountered late or unpaid invoices in the past year.
Odd or late payment cycles can seriously jeopardise your cash flow and, ultimately, your business.
Even your best customers will sometimes pay late and often will ask for payment extensions, but you as a business owner need to ensure you understand the various payment cycles that can impact your growth or day-to-day operations.
Are there ways to support clients or customers with paying on time?
Our tip: Make life easier for your clientele - adapt your payment methods so that people who buy from you can pay on time.
One of the frequent reasons why clients might be late with settling the invoices is precisely your payment method options. Find out what is most convenient for both sides - adapt and change accordingly.
Potential considerations are payment plans, bill more often (every 2 weeks for example), ask for upfront payments, and give a discount or, depending on your business, consider a retainer-model.
7. Bad debt
Is there is anything worse than clients being late with their payments?
There sure is! That's clients unwilling to pay at all.
This is called bad debt and is frequent in cases where businesses are trading on ceratin terms for certain clients, such as payment extensions or reducing fees for what ever the reason may be.
You can read more about bad debts here.
Typically, the older a debt becomes, the lesser the chances you receive the money from that debt you are owed.
Chasing that money can also cost more money and more time than what the original amount is owed, which is a situation you certainly don't want.
Our tip: Act fast, as if the house is on fire (In other words, make it a priority to resolve or come to a solution).
If you have debts that are difficult to resolve, hiring a debt collector may well be your go-to quick fix. This will save you time and remove a serious issue from your list of "things to worry".
8. Unexpected expenses
Being a business owner, you unexpected situations come up all the time.
"You never know" is a phrase which we all use in our day-to-day interactions in life - and this certainly applies to business.
It's hard to predict what expenses come up in business or significant changes that do arise. There are both external and internal contingencies that may arise, which are simply out of our control.
Most of the time, these changes in business often aren't calculated in initial forecasts, and it's hard to put a number against those specific circumstances when they do come up.
This can include anything from loss of staff, breakdown of equipment, or requiring extra marketing expenses due to increased competition in the market.
Out Tip: Prioritise on expenses that are crucial for the business and cut out costs that are "nice to have."
It may seem like stating the obvious, but how do you prioritise your expenses?
Do you really need to pay for that software tool that you barely use for email marketing, yet it's $400 out of your account each month?
While that may be a small example, multiple tools like this in your business can seriously add up. Cutting down on expenses which aren't a priority, or even making a big dent in growth, will go a long way to saving and building up a cash reserve.
9. Poor financial planning and not having an organised accounting system
You've heard the saying "Fail to prepare, prepare to fail".
Discipline is key when it comes down to financial planning.
More importantly, you don't need to be cash flow or financial wizards in order to run a successful and growing business.
Cash flow shortages do occur for those startups and small businesses which do not take financial planning seriously.
You need to have a detailed financial plan, budgets, and forecasts, to which you can come back to ensure your business is on track periodically.
Additionally, simply relying on your accountant or financial advisor, while they help in certain aspects, they don't understand all the daily considerations that matter for your business.
Our tip: Organise your financial documents.
Place your profit statements in one folder and your loss statements in another. Review your cash flow statements and your cash flow forecasts. If you need help, look for templates on the internet that can guide you through the process.
As your business matures, or even when starting, it's always best to hire a professional accountant. After all, you can't be an expert in every segment of your business.
Or as a matter of fact, there are parts of accounting and financial management which are meant purely for accountants to help you, such as taxes, company structures, etc.
As the old saying goes, cash is king, and this very much applies to all businesses - any industry, any type.
Keeping a close eye on your cash flow in and out of your business is crucial to ensure your startup or small business has continued success.