Starting a business is possibly one of the most exciting things you can do for yourself, but it is also fraught with pitfalls for the unprepared. In Australia alone, more than 60% of small businesses will stop operating within their first three years of operation.
Small businesses can fail for any number of reasons, from poor management and ineffective training, to trading losses and a lack of startup capital. Cashflow is also integral to your business, once it has been established, and poorly managed cashflow can spell disaster for businesses of any size.
To help you make the most of your business finances, here are seven simple tips that will give you some mastery over your cashflow.
1. Plan Ahead
Planning really is the most important part of starting anything successfully, let alone a new business. You should begin with a business plan, before you even spend a cent on your amazing venture, and once you’ve started the ball rolling, you should carry out a cashflow forecast.
The idea of a forecast is that, while not an exact representation of what your business will go through, it allows you to be prepared for any upcoming hurdles. These hurdles could include seasonal stock requirements, annual low periods in trading, or the inevitable waiting times between invoice payments. Once you have identified where the cashflow blockages are likely to occur, you can plan for them, instead of flying blind.
It’s a good idea to get into the habit of using a rolling forecast, preferably covering 12-16 weeks. This will allow you to always look ahead, and be prepared, no matter how long your business has been trading for.
2. Listen to Your Inner Pessimist
This tip is especially important when putting together your business plans and cashflow projections. When you are planning to start a business, you should absolutely be optimistic and ambitious. This is how small businesses start, with people wanting to make a difference, even if it only to their own lives. Just keep an ear out for the inner pessimist.
You don’t need to give in to the negativity, but acknowledging that there will be unforeseeable situations during the life of your business is a very intelligent way to approach your own startup.
In regards to your cashflow forecast, it is good idea to overestimate the amount you are likely to spend, and underestimate the amount you are likely to make. This will help you avoid cashflow holdups, or at least mitigate the impact these holdups have on your capital.
3. Be Strict with Invoice Payment
One of the things that will seriously tie up your projected cashflow is late payment from your customers. To make sure that this is not an ongoing issue, you need to stay strong, and demand on-time payment. To do this, you will need to establish a strong invoicing process, and you must keep an eagle-eye on the dates and amounts of invoices.
It may sound harsh, but if you have repeat offenders who constantly pay late, you should reconsider your working relationship with them. It may be a sign that they have cashflow issues of their own, which could eventuate in non payment.
By being strict with your debtors, you will establish a culture of on-time payment. This will mean that your capital is yours to use, and is not tied up in paperwork.
This is not a one-way street, though. You should also be strict on yourself, regarding payment of invoices to your suppliers. By constantly providing on-time payments to your suppliers, you will establish strong working relationships that will benefit you in the long-run.
4. Consider Offering Incentives for Early Payment
While on the topic of invoicing, early payment is even better than on-time payment. This is rarely achieved on its own, as other businesses have their own cashflow needs to consider. If you do want people to pay more quickly, however, incentives for early payment can work extremely well.
This will most likely be in the form of a small discount on your invoice price, e.g. 3-5%. You could offer higher discounts on bulk orders too, to make sure that larger payments are processed in a timely manner. While this will cut down on your margins slightly, it does go a long way towards establishing that previously mentioned culture of payment.
Discounts are not the only incentives, either. You can extend bonus offers on future purchases, or give special gifts that are only available through early payment. These incentives should be factored into your business plan and cashflow forecasts, as well, to make sure that they are not impacting too much on your working capital.
5. Pay Yourself
It might seem like a strange tip for optimising cashflow, but it is any extremely important one for a couple of reasons.
Wages or salaries are an integral part of any business, and most business owners understand that. Many, however, neglect to include themselves as an employee of the business for cashflow purposes. By paying yourself a reasonable salary, i.e. one that will allow you to live without dipping into business funds, you will get a much more realistic understanding of your business’s cashflow requirements.
Starting your own business, while often very fulfilling, will also be one of the most stressful things in your life. By paying yourself a salary, you will be able to make sure you don’t have personal financial pressures to add on top of that stress.
6.Only Hire When Your Business Really Needs It
While your business definitely requires you to be working there, you should be wary of hiring new employees until your business absolutely can’t live without them. The main, and obvious, reason for this is that hiring new staff increases your expenditure, making it harder for your business to run profitably, without necessarily bringing in more revenue.
If you are over-stretched and can’t work any harder, consider outsourcing some of the tasks that aren’t part of the core of your business. Outsourcing will allow you to only use the skills of other people when they are required, and you can seek people with specific skills that you may not possess, such as administration, HR, accounting, and finance.
Staffing is something that you constantly need to reassess, though. Don’t hold out on hiring for the sake of expenditure, if it means that you are going to burn out and not be able to run your business effectively. Make sure that, when you do hire, you are hiring the right person for your company, and not just someone to fill the space. Being choosy will definitely pay off in the long run.
7. Keep Stock Low
Keeping your stock low may seem counter-intuitive, but if you formulate your initial business plan to accommodate this, it will certainly help with your cashflow. While this may not suit more established businesses, it is certainly a good idea for startups to run on this business model.
Having excess stock is bad for your cashflow for two main reasons. Firstly, your capital is tied up in goods, and you can’t access it for other purposes, such as purchasing other stock, paying wages, or marketing. Secondly, the more stock you have, the more it costs to store it.
To make this plan work, you will need to factor in the time it takes to receive your stock, and hold just enough to satisfy projected sales at any given time.
This is not the ideal ongoing business model, in that you will need to order smaller amounts of stock more frequently, which may impact on both your sales margins, and the cost per unit from your supplier. This model is designed to help you establish a good cashflow, though, and grow your business. Once your business is making more money, you can reassess your purchasing strategies.
While these tips are all important in the success of your business, they have one thing in common. Planning is the most integral ingredient for success in any venture, and by putting plans in place for all aspects of your business, you are markedly improving your chances of success.