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

Voices
There will be a chance to bid for a rare example of the SAS Diary, collated by a former member of the regiment in the aftermath of World War II but only published – in a limited run of just 5,000 – in 2011
charity appealTime is running out to secure your favourite lot as our auction closes at 2pm tomorrow
Arts and Entertainment
Mark Wright and Bianca Miller in the final of The Apprentice
tvMark Wright and Bianca Miller fight for Lord Sugar's investment
Arts and Entertainment
X Factor winner Ben Haenow has scored his first Christmas number one
music
Arts and Entertainment
James May, Jeremy Clarkson and Richard Hammond in the Top Gear Patagonia Special
tv
PROMOTED VIDEO
News
File: James Woods attends the 52nd New York Film Festival at Walter Reade Theater on September 27, 2014
peopleActor was tweeting in wake of NYPD police shooting
News
Claudia Winkleman and co-host Tess Daly at the Strictly Come Dancing final
people
News
i100
Extras
indybest
News
peopleLiam Williams posted photo of himself dressed as Wilfried Bony
Sport
Martin Skrtel heads in the dramatic equaliser
SPORTLiverpool vs Arsenal match report: Bandaged Martin Skrtel heads home in the 97th-minute
Arts and Entertainment
The Apprentice finalists Mark Wright and Bianca Miller
tvBut who should win The Apprentice?
News
The monkey made several attempts to revive his friend before he regained consciousness
video
Extras
indybest
News
Elton John and David Furnish will marry on 21 December 2014
peopleSinger posts pictures of nuptials throughout the day
Life and Style
A still from the 1939 film version of Margaret Mitchell's 'Gone with the Wind'
life
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs Student

Ashdown Group: Trainee / Graduate Helpdesk Analyst

£20000 per annum: Ashdown Group: A highly reputable business is looking to rec...

Recruitment Genius: Graduate Software Developer

£25000 - £40000 per annum: Recruitment Genius: Join a fast growing software co...

Guru Careers: Graduate Account Executive / Digital Account Executive

£20k + Benefits: Guru Careers: We are seeking a Graduate / Digital Account Exe...

Guru Careers: Junior Designer / Design Graduate

£18k: Guru Careers: We are seeking a Junior Designer / Design Graduate to join...

Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

Day In a Page

The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'
Marian Keyes: The author on her pre-approved Christmas, true love's parking implications and living in the moment

Marian Keyes

The author on her pre-approved Christmas, true love's parking implications and living in the moment
Bill Granger recipes: Our chef creates an Italian-inspired fish feast for Christmas Eve

Bill Granger's Christmas Eve fish feast

Bill's Italian friends introduced him to the Roman Catholic custom of a lavish fish supper on Christmas Eve. Here, he gives the tradition his own spin…
Liverpool vs Arsenal: Brendan Rodgers is fighting for his reputation

Rodgers fights for his reputation

Liverpool manager tries to stay on his feet despite waves of criticism
Amir Khan: 'The Taliban can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'

Amir Khan attacks the Taliban

'They can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'
Michael Calvin: Sepp Blatter is my man of the year in sport. Bring on 2015, quick

Michael Calvin's Last Word

Sepp Blatter is my man of the year in sport. Bring on 2015, quick