The overlooked art of cashflow management


Successful entrepreneurs usually concentrate their efforts on three key areas: vision, people and cash.

Successful entrepreneurs usually concentrate their efforts on three key areas: vision, people and cash. Much advice and attention is lavished on the exciting work of developing and articulating a vision for the business: the grand strategies for world domination, or on ideas for hiring, managing and motivating a great team. The boring numbers bit about managing cash-flow too often takes a back-seat. However, to succeed in business, you must first avoid failure, and all businesses fail in exactly the same way: they run out of cash.

By having an accurate forecast, you will be able to judge your expenditure carefully, manage your working capital and seek additional funding in good time.

Doomsday: know when the cash is going to run out

The first step is to have the discipline to keep an up-to-date forecast: write down your best estimates of the amounts and dates of all payments and receipts to predict your daily bank balance. You will then be able to calculate your “doomsday date” – the day on which you will run out of cash and go out of business if you do not change things. Initially this may seem dauntingly close. However, by assessing each decision in the light of this date, and by making choices which push this date further into the future, you will quickly find that you are no longer fighting for survival, but building a secure platform from which to succeed.

My business is an eBay broker. We send out a van to collect items from homes and businesses and bring them to our warehouse where we then sell them on eBay for a commission. Each step in the process has a cash implication – buyers pay and sellers get their cheques; we receive monthly invoices from eBay and fortnightly ones from Royal Mail to be paid according to their terms; our landlord demands payment three months in advance and holds a deposit; our van is an up-front capital expenditure, but the driver and all the listing staff expect payment on the 30 of the month; and the taxman wants his share on time each month and each quarter.

To manage this complexity, we maintain a daily cash forecast for the next month and then monthly beyond that. By doing so, we have been able to grow the business to over £1m of sales, employ 25 staff and retaining full ownership. During the past seven years we pushed our doomsday date from a matter of days out to well over a year into the future.

Manage your burn rate

Most start-ups initially make losses while sales are still getting going. This is a dangerous time when a company can burn its way through its cash, and many decisions affecting growth need to be taken.

Can you afford to take the larger office space? Will you spend money on a cheap last-minute marketing slot? Can you pay a little more to hire a great person into the team? You can use your cash forecast to manage these choices so that you always plan to be profitable before the cash runs out. There’s no point in building a huge operation and having a glamorous TV advertising campaign if it’s all going to end up in the hands of the administrators.

Control your working capital

Cashflow is more than just profitability. If you buy stock or have a rent deposit, for example, then you will need cash for working capital. Moreover, this often grows as your sales grow, making it harder to become cash-flow positive. The amount you need is offset by the terms you can agree with suppliers – for example if you can pay 30 days after delivery instead of up-front. Build a relationship with your suppliers to allow you to keep lower stock levels and specifically negotiate payment terms. It may even push your doomsday date out further to pay a slightly higher price but have next-day delivery and be on better payment terms.

Secure funding early

All forecasts are, at best guesses, about the future, so it is vital to have contingency plans. What happens if you have a problem and your sales stop for a week? What if a machine breaks? What if a significant customer is late in paying? It is far better to set up lines of credit early when you have time and don’t need them – you may find it impossible to do when the crisis strikes. Agree an overdraft facility with the bank if you can, and credit limits with your card providers – they are free if you don’t use them, but can be a vital lifeline in a credit crunch.

You might decide that you will need to get some extra funding into the business to realise your ambition: usually either a bank loan or by selling equity to an investor. Don’t underestimate the time and the amount of your attention that it will take to close this – so do it as early as possible and when you have cash in the bank to explore alternatives. Your first choice of investor might say no and you are in a much stronger negotiating position if you haven’t yet committed to spending the cash he will give you!

Starting a business is an exciting time, but by tempering your enthusiasm briefly to make sure the cash will be there in the future, the excitement will last a long time into the future as your business prospers.

David Brackin is co-founder of Stuff U Sell