Why is it so many start-ups fail? With half of new SMEs out of business by their fifth year and 70% done in a decade, it’s one of the key questions in modern industry.
Perhaps it’s a lack of a defined USP or the
inability to build a steady client portfolio? It might be down to an absence of
a true business plan heading into a saturated market. For many start-ups,
however, the end comes down to simply running out of money.
Cash flow issues are the second biggest reason for
start-up failure behind a lack of market need, but this a problem that is
potentially avoidable with better planning and organisation. Here’s how to keep
the money from drying up in your new venture.
Control Your Spending
Go hard or go home, so they say, but that
shouldn’t apply to your spending
plan. Of course, every business intends to achieve success and profit
through expansion of its commercial offering, but stretching yourself too far,
too soon can mean big issues for cash flow.
When approaching business spend, it’s
important to identify priorities, create realistic goals and stick to them,
regardless of the temptation to go big on investment. A lot of good cash flow
management comes down to timing, so understanding when and when not to take on
new projects is key.
Save for the Unexpected
A benefit of good spending control is
allowing for contingency in an unpredictable business world. Being able to fall
back on a substantial cash reserve in the face of unforeseen circumstances will
take a huge weight off your mind and allow you to focus on moving forward.
Just as in life, business has a habit of throwing unanticipated hurdles in the way, and not being prepared for the unexpected has derailed many a start-up venture.
Related Reading: Have You Planned Emergency Funding for Your Startup?
Get Ahead of the Ledger
A stark reality of professional life is
that profit
does not necessarily equal cash flow. Despite the health of your P&L, a
lot of that money may well be sat on the sales ledger, yet to bolster your
coffers.
Late payers and bad debts are a matter of
course in business. Start-ups must therefore do what they can to get money owed
in as quickly as possible, and there are a couple of ways to do this.
The first is to offer pricing discounts in
exchange for early payments. Whilst this may impact your profit margin, it will
boost your cash flow management significantly, with your customers incentivised
to get payments in ahead of the billing cycle. A small dent in margin is a
potentially worthy trade off for buoyant cash flow.
Secondly, SME’s can seek an advance on their
ledger via a supplier providing invoice
discounting. Confidential invoice discounting (CID) gives SMEs a guaranteed
and substantial cashflow solution by offering immediate access to cash tied up
in unpaid invoices.
Again, you will have to sacrifice a slice
of your profits to supplier rates, but CID can provide a palpable solution in
times of need for a cash strapped start-up.
The Bottom Line
Managing your cash flow correctly really comes
down to discipline, solid planning and exploring the options available to you.
All, in theory, should be easy to practice, but the unpredictability of
business means it’s easy to slip up.
Always remain lucid on business goals, and make sure you work within your resources and you’ll stand a much better chance of start-up success
