If you have used your time in lock down to re-evaluate some of your goals and ambitions, you may have decided that now is the right time to take the plunge and launch your own business. If you have recently started-up a new venture or you are in the research phase, it is essential for you to be well prepared. There are numerous steps you should take when writing a business plan, such as identifying your target market, competitors and creating a cash flow forecast. Creating a structured plan can provide stability and help track the progress of your small business as it grows. You can read about the importance of cash flow below but see our previous blog for help with starting a business.
Fund Your Business
There are two main categories of funding your business – internal and external. With obvious distinctions, these broadly mean whether the money came from you or from strangers.
Internal funding consists of:
- Personal Savings
- Credit Cards
- Funds from family & friends.
If you finance the business with your own money or if you put it on credit cards, you must pay the debt on the cards (as well as any interest!) and you’ve lost a chunk of your wealth if the business fails. By allowing your family members or friends to invest in your business, you are risking strained and possibly broken relationships if the company goes under. Business owners who want to minimize these risks may consider external funding.
External funding consists of:
- Small business loans
- Small business grants
- Angel Investors
- Venture Capital
Many businesses may have to use a combination of all the above. Consider how risk tolerant you are, how much you need and how long it will take you to pay it back! No matter what source you use, always plan for profit! To help you plan for profit, create a business plan.
Follow the cash flow to profit!
One of the most important lessons entrepreneurs and small business owners must learn is that cash really is king. I’m not talking about physical money — I’m talking about cash flow.
There is so much uncertainty surrounding the business market at present both politically economically and this is impacting on how businesses are choosing to operate. Inevitably it brings managing cash flow into focus. Companies looking only at their earnings and not managing cash flow will find it difficult to continue trading in today’s economy and will need the support of flexible financing to ensure the future success of their business.
Simply put, it doesn’t matter how much money is coming if you don’t have enough money to get from here to there. Employees can’t wait on pay checks until your customers pay. Your landlord doesn’t care that you’re talking to investors and will have the money in a couple of months. Suppliers may not be willing to extend your credit any further and you may not be able to purchase the goods you need to deliver to your customer and receive payment.
More businesses fail for lack of cash flow than for lack of profit. Why is this? Two main reasons:
- Business owners are often unrealistic in predicting their cash flow. They tend to overestimate income and underestimate expenses.
- Business owners fail to anticipate a cash shortage and run out of money, forcing them to suspend or cease operations, even though they have active customers.
How to Project Cash Flow
- Start with the amount of cash on hand – your current bank account balance(s) plus actual currency and coin.
- Make a list of anticipated inflows – customer payments, collection on bad debts, interest, or investment earnings, etc. List not only the amount but also when it will be coming in.
- Make a similar list of anticipated outflows – payroll, monthly overhead, payments on accounts payable or other debt, taxes payable or set aside for future payment, equipment purchases, marketing expenses, etc.
Put it all into a spreadsheet in chronological order – if at any point you have a negative cash balance or even a very small one, you have a potential problem.
It’s best to be extremely conservative, i.e., estimate inflows lower and sooner and outflows higher and later. If you end up with a cash surplus, it can cover you for an unanticipated cash shortage in the future or be invested in something to help grow your business – you won’t have a problem finding something useful to do with the money. On the other hand, if you end up with an unanticipated cash shortfall, you can end up damaging your credit, losing suppliers, having to cut employees, or out of business entirely.
Track Your Actual
Keep a copy of your forecast but track your actual cash flow as well. Comparing it to your forecast will help you realize where you have mis estimated or overlooked something in your planning. Past cash flow statements and future cash flow projects are among the core financials you will need as part of your business plan for potential investors. After a few months of tracking it, you’ll also find it an indispensable management tool.Tips to Help!
Tips to Help!
Dedicate someone to manage cash flow
It’s important to understand the business’s cash flow position. Having a member of the team whose responsibility it is to track monies coming in and monies going out is vital. Managing cash flow can be an unpredictable task so ensuring the cash flow position is clear and whether there is sufficient funds in the bank is required. Any issues should be raised and discussed with a plan of action put in place immediately.
Agree clear payment terms
Establishing clear payment terms from the outset is important. If you don’t start off knowing what your payment terms are, it is difficult to know when you are going to get paid. If you don’t know when a payment is overdue, you can’t manage cash flow. In our view 30-day credit terms are the norm. Your employees need paying in 30 days and your suppliers also need paying in that time.
Invoice clients as soon as the work is completed and consider using email for faster and easily traceable delivery of that invoice. Always follow up the invoice with a courtesy call to check the invoice has been received and that there are no issues with it and therefore it’s payment. Clearing up any invoice queries early on reduces the potential of issues arising later.
Make it easier for customers to pay
Make sure invoice carries the name of the person it needs to go to so that it doesn’t get lost in the customers business. Ensuring the invoice carries full payment details – bank account sort code and account numbers – to make it easy for customers to pay. Make sure the agreed credit terms are clearly stated on the invoice as well as the date when payment is due.
If you have used your time in lockdown to re-evaluate some of your goals and ambitions, you may have decided that now is the right time to take the plunge and launch your own business. If you have recently started-up a new venture or you are in the research phase, it is essential for you to be well prepared. There are numerous steps you should take when writing a business plan, such as identifying your target market, competitors and creating a cash flow forecast. Creating a structured plan can provide stability and help track the progress of your small business as it grows. You can read about the importance of cash flow below but see our previous blog for help with starting a business.
Need someone to manage your accounts after starting a new business? Book a meeting or contact us today.