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Learn the value of cash flow

how to start a business

“Never take your eyes off the cash flow because it’s the lifeblood of business”.

-Richard Branson-

Cash flow is like blood flow. In the same way your organs need a constant supply of blood to maintain their function, the different parts of your business need a constant supply of cash or else like your organs they’ll fail and eventually you and your business will die.

Fortunately, for you your body takes care of the whole keeping a pulse thing so you don’t have to worry about it but with cash flow that’s all on you.

What must go out must go out

Your first port of call is to figure out what definitely needs to go out every month, for example paying staff and your most important suppliers. You don’t have a business if you can’t actually make a profit in whatever it is you’re selling because everyone who is crucial in the process of getting it to market has left.

Whatever number this is, you must have enough cash to hand at the end of every month to cover it. This is your bare minimum, it must be covered. Do not confuse cash flow with profit. You might have a profit on paper but in reality if your bank balance is in the red your business will not live to see that profit. If you manage your cash flow well you’ll definitely manage your profits well.

Keeping a positive cash flow over the long haul

Some definitions first:

  • Positive cash flow: Cash outflows are less than cash inflows over a given period.
  • Negative cash flow: Cash outflows are more than cash inflows over a given period.

Sometimes a negative cash flow is unavoidable, we have gone through periods where money just kept going out, but we were aware of these periods and focused on getting out of them and we had a cushion in that we had enough cash to hand to cover the drought in cash inflows.

That’s the first thing you need to do though, be aware and to that end get some cloud-based accounting software. We use Xero not only do you get all the financial accounts you could ever dream of. You can also create and send invoices out directly from it to your customers which is good because you want to invoice customers promptly, if you’re punctual it encourages everyone around you to be so too.

This is really useful because if any of your invoices go overdue you’ll know about it, it’s right there on the dashboard and ready for you to tackle.

When you can see who owes you what by when in one place and it’s clear it makes the whole process of chasing up debts easier and therefore you’re more likely to do it.

You can send statements or escalate to phone calls but the key point is you’re proactive.

In our case we like to send reminders to customers a week before an invoice is due. It’s a lot better to give a gentle prod before an invoice is due than chase one after its due. Through this method we saw a significant impact on our cash flow. A lot of times customers are busy and it’s good to remind them that you a) exist and b) we have this invoice here it exists too please pay it.

Plus it’ll keep a record of your customer payment history, even giving you how many days they usually pay you by. This is of course useful because it can help you plan around the pain so it doesn’t catch you off guard and if a client has a history of difficult repayments you can avoid giving them credit for example in the future.

Credit check

At first we were just happy to get any and all clients, but as we’ve grown we’ve learned that it pays to be selective. Some clients are more hassle than they are worth and it really pays to do some research on them.

Credit checking need not be time consuming and expensive, for example in addition to Xero we use Satago, it integrates with Xero and is free to use. Just type in the company name of the client you’re thinking of taking on and it gives you some basic information for free including a risk assessment.

Deposits

Every client you take on comes with a risk, we’ve been burned in the past that’s why we take deposits. This is especially important on big projects. You’re taking a risk and there is a possibility of a client simply running out of money down the road.

The other reason is deposits encourage payment, once someone is invested in something they’re more likely to follow through and it also shows commitment to you.

For example, studies have shown punters are more confident in their horse winning after placing a bet than before. Nothing has changed, the horse hasn’t gained extra legs (that probably wouldn’t help) but they’re all in and they have to justify it to themselves.

Get personal

Get to know your suppliers, if you have a personal relationship with them you can get more flexible terms, you shouldn’t abuse the trust you gain but when you need it use it and of course any relationship built on trust is based upon reciprocation.

Bargain hunting and haggling

Another way to improve your cash flow is by reducing your outflows as much as possible, if you’re a small startup, is a dedicated large office space really necessary for productivity? If not then save the money and use it where it will have a real impact on your business. Try leveraging your skills to a supplier, for example if you’re in web development you can offer to help refresh their website in return for a continuous discount. It never hurts to ask.

In addition, if you have a lot of suppliers you can cut down on complexity and cost by cutting that number down and renegotiating with a few of them for better deals.

You also don’t need fancy expensive software to get things done, for tasks we use Asana it’s free for up to 15 team members and for logging time to projects we use Toggl and get a month’s saving by simply choosing to pay annually instead of monthly. The point is don’t just go for the obvious expensive stuff, there are bargains out there that are just as good if not better.

Chartered Accountants

If you’re a sole trader you probably don’t need an accountant yet but even so you should think about it. We have accountants, they are very good. They know things we don’t and they do things we don’t want to do better than we could ever do them leaving us to focus on what we do like doing. Working on making RealtimeCRM the best CRM product out there.

OK so what’s so great about accountants?

Well ok, they’ve made us money. We have used them in the past to claw back some of our costs on projects, for example we’ve done work at the cutting edge for clients in addition to our work on RealtimeCRM and that allowed us to take advantage of the R&D tax relief program.

We didn’t know about this or how to go through the necessary paperwork credit to our accountants they did and made the whole process as smooth as possible and at the end of the day it helped our bottom line as well as our cash flow.

They also save you time on things like payroll and other tasks that as you hopefully grow will take up more and more time, it’s just a lot easier to outsource it to them and as the old adage goes time is money.

You should of course look for accountants who have some experience dealing with small businesses, having knowledge of your sector is also a huge plus because you can ask for their view of your processes and generally how you’ve approached your business to see where you can improve and it’ll be from people who are knowledgeable and have intimate knowledge of your business.

The last word

You should view cash flow with the same sense of urgency you view your sales. Stay on top of what’s going on and intervene when the outflows start outweighing the inflows as soon as you can to stop the cash bleeding, the survival of your business, your future plans and dreams all depend on it.