How To Keep That Cash Coming In When You’re A Start-Up

How To Keep That Cash Coming In When You’re A Start-Up

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Cash flow and profit may seem to be the same but they are not. They’re closely linked and of equal importance. Profits generate cash, and losses consume cash, so if your company makes ongoing losses it will run out of money and be unable to pay its bills. You will then have to inject more cash, obtain overdraft facilities or close down.

Over a period of making profits the company will generate cash but may also use more cash to build up inventory, and some cash may be inaccessable because debtors have not yet paid.

Profitability does not necessarily mean there is more cash around, especially if you are growing rapidly.

Cash is the amount of money you have in the business at any point in time; in cash, the bank and short-term investments or saving accounts. Cash flow is the amount of money moving in and out of your business over a period, usually one month.

A positive cash flow means you have more money at the end of the month than you had at the beginning of the month and a negative cash flow is the reverse. In established and profitable businesses, cash flow will swing between positive and negative, but the overall trend will be positive.

Related: Cash Flow Tips For Small Businesses To Survive Rocky Times

The reasons for this swing are time differences between paying your suppliers and being paid by your customers. Months in which customers pay for big sales will mean lots of cash in the bank, but in other months you may struggle to pay the bills, even if you are making good profits.

Running out of cash

For start-ups, the number one enemy is running out of cash. It is the cause of most start-up failures, where the company cannot pay accounts and wages. All entrepreneurs should watch cash flow but start-up entrepreneurs must manage cash flow very carefully, and understand financial management if they want to stay in business.

Your accountant will usually provide a cash flow statement in the monthly management accounts, but you should also develop a projection of future cash flow. Do this by comparing income from expected payments by customers to known expenses, including supplier payments. The results will tell you if you need to arrange overdraft facilities or can plan expansion.

Improving cash flow is not as hard as it seems, as long as the business is profitable. If it is not profitable, fix that first. Then set up your company to operate efficiently. Implement stock management and purchasing systems that will ensure you have only the stock you need.

Give credit to approved customers, but only once you have done a thorough credit check. Then ensure they stay within their payment terms. Always try to get at least a part payment up-front. Many businesses will not deal with a new or suspect customer unless they pay a deposit, usually equal to the cost of materials purchased or manufactured by the business.

Paying suppliers

One of the most frustrating situations happens when you are not able to pay a supplier because your customer hasn’t paid you.

Related: Funding Solutions That Support Business Cash Flow

The supplier may become insistent or institute legal action to collect money you do not yet have. This is a surprisingly common situation and one that can lead to failure of your business, and that of your supplier. Enforce your credit terms even with large reputable customers.

Profitable, fast growing companies generate cash, but may get lazy about managing stockholding, collecting debts, and controlling spending on unnecessary luxuries. Sometimes they are unable to pay suppliers on time because of poor planning.

Eliminate these inefficiencies to ensure you have cash for real expansion like new machines and marketing campaigns to make your business even more profitable. Cash flow is one of the most important items of management information, right up there with sales and profit. Use it to your advantage.

Ed Hatton
Ed Hatton is the owner of The Marketing Director and has consulted to and mentored SMBs in strategy, marketing and sales for almost 20 years. He co-authored an entrepreneurship textbook and is passionate about helping entrepreneurs to succeed.