Yes, cash flow is the Achilles Heel of most enterprises, both big and small.
Don’t procrastinate fix cash flow problems promptly
An Achilles‘ heel is a weakness in spite of overall strength, which can lead to a downfall, often a quick and dramatic downfall.
A cash flow problem is simply when money going out exceeds the money coming in. No business can sustain this for very long before the problems start to compound. Of course, if you have money to burn you can stay in business for a long time.
Cash flow is the lifeblood of any organisation.
Cash flow is a symptom, look for the causes
There could be a number of reasons why you have a cash flow problem, Particularly when you are learning how to run the business and your customers are few and far between.
Usually, the sources of cash flow problems can be categorised into these main areas:
- Poor sales performance, products/services not moving.
- Too many outstanding/uncollected invoices.
- Poor business model.
- Ineffective and inefficient systems and management.
When it comes to starting a new business or non-profit organisation of any sort, it would be difficult to exaggerate the importance of keeping a close eye on your cash flow.
Here are some tips to help avoid cash flow problems, the curse of start-ups
Understand the importance of sales. No sales can quickly lead to no cash flow, no wages, no employees and no business. If you’re not making sales then you don’t really have a business and cash flow problems will not go away.
Therefore, from a startup perspective, generating sales and building good paying customers should be at the top of your agenda from the moment your enterprise begins operating. Carefully targeting your first few customers will be a big help.
A budget is the most useful tool. Financial forecasting is often far from a precise process but it nevertheless serves an important purpose as a means of sketching out the kind of financial progress that you make.
Making projections for the coming weeks, months and years can serve a particularly valuable function for startups, for whom financial flexibility will often be lacking. It is important to allow for contingencies and periodic payments. A good budget will help you to avoid unpleasant surprises.
As a rule of thumb, it is good practice to overestimate anticipated outgoings and to underestimate likely revenues in order to avoid cash flow becoming the major cause of your problems.
Forward planning will help to overcome shortfalls. Be clear on your purpose, vision and objectives and make sure all your activities are aligned with them. It is too easy to be sidetracked and to become involved in activities that do not help to improve the cash flow. Forward planning requires the creation of good financial strategies. Bad strategies lead to bad outcomes.
Poor planning leads to procrastination and over-engineering of the wrong things at a critical time will soon lead to a crisis. It is important to keep a tight control on new product development in the early stages. It is far better to focus on repeat business resulting from good customer service and a good customer experience.
Keep your costs as low as possible. It is easy to spend money when the cash starts to flow. However, a positive cash flow is reliant on creating a sustainable balance between revenue and expenditure. The equation is a simple one and all startups should be aiming to keep their outgoings as low as possible.
The good times come sooner when you have good control. Only spend money on productive assets in the early stages, new cars, expensive holidays and glamorous offices can wait.
Measure everything. It’s only when you measure everything affecting your finances that you will be able to understand exactly where your strengths and weaknesses are and how you can pursue the best opportunities for profitable growth and sustainability.
A good bookkeeping system and a good bookkeeper are critical and will save you a lot of frustration and heartache. Measuring and recording financial details can also serve to highlight where you are overspending and where the most profitable aspects of your business are likely to be.
“Always act enthusiastically about you proposed business, it is infectious and generates opportunities to attract money”. Peter Sergeant
Do what you can to get paid faster. It is crucially important to do whatever you can to ensure that they receive money owed as early on as possible. This will start by doing as much business as possible for cash or credit cards and doing proper credit applications if you intend to offer credit.
You are not a bank or lending institution. Failing to do so can very quickly lead to cash flow problems caused by bad debts. Issuing invoices promptly and providing incentives early payment should be a key focus.
Schedule creditors payments wisely. It is generally prudent to be concerned about your cash flows and to hold off on paying suppliers until those payments are due under the terms of a given agreement.
It’s important to maintain good relationships with suppliers but generally keeping cash in your account rather than your supplier’s as long as reasonably possible can help keep your cash flows more positive.
Build trust with your suppliers. Keep in mind that a supplier who is treated well will usually help you if there is an unexpected crisis, or you need to negotiate better terms and conditions. For many, cash flow problems will at some time prove unavoidable. If you have any real difficulties, they can always be overcome where there is a high level of mutual trust.
Don’t expect too much of suppliers to whom you owe money, But good communications can in some instances buy you enough time to ensure that your cash flow issues are overcome and they don’t turn into serious problems.
Understand working capital and how to manage it. Going into any new enterprise undercapitalised is asking for trouble, particularly if you have no understanding of working capital and how to manage it.
Never stop learning. Become financially savvy as soon as possible. It doesn’t take that much time to understand the fundamentals of good financial management. Remain consistently determined to learn more and more about what matters most to your organisation, which in many cases will be issues around marketing and financial management.
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Even with great ideas and all your best efforts, sometimes start-ups don’t make it to sustainability. However, by using the cash flow problem as a symptom and focussing on the causes, it is possible to tilt the odds of success in your favour.
I find it is always important to always look at the best and worst case scenarios, but don’t bank on best case scenarios. Being positive and optimistic is critical in getting an enterprise up and running well, all day every day. But a cautious approach is advisable when it comes to calculating cash flows. Be very careful in assuming you will achieve your best case scenario.