The ability to generate cash flow in the infant stages of a new start-up can be a deciding factor as to whether a business survives or fails.
With roughly a quarter of Kiwi businesses failing within the first three years, it is important to have a good foundation and take the right decisions around money.
Simeon Burnett, Chief Executive and Co-Founder of ‘Snowball Effect,’ an Equity Crowdfunding Platform, said that one of the classic mistakes start-ups make is not having a clear plan around cash flows.
“A good idea would be to map out the next 18-24 months of cash flow on a monthly basis, run multiple scenarios to get a sense of how much cash you’ll need to get through, then plan out how you will fund it.
“Your forecasts will always be wrong, and hence it is important to test them. You should understand what a ‘worst case’ may look like and plan accordingly,” he said.
Things that can cause cash flow issues.
Not invoicing sales or collecting debtors in a timely fashion.
Paying suppliers upfront
Buying excessive amounts of stock This is potentially a double whammy as it can also impact overheads such as storage costs. Only ordering enough stock to satisfy estimated sales in your lead time plus a week or two.
Under-performing overheads such as staff. This includes a sales team who are not hitting KPIs or marketing that is not generating enough leads.
In the early stages, keep personal drawings to a minimum and use the profits to grow the business.
Mr Burnett said that the reality for most start-ups is that they sail into the unknown, things cost more and generally take longer than they may think.
“If you do not have a financial background, see if you can find an experienced mentor who can review your forecasts and plans, and challenge you on how realistic they are,” he said.
According to him, depending on the number of founders that the business has, things like loans and credit cards when cash flow is tight can get messy and cause issues down the track.
“If your start-up has legs, chances are that you must bring in a good tranche of capital to get things moving. Get your company to the point where you have validated your product and service in the lowest-cost manner possible, then draw up a capital plan to see you through the next 12-18 months,” Mr Burnett said.
More advice from Simeon Burnett on improving cash flow
Understand the major costs levers of your business.
Is it labour costs which are relatively fixed, or customer acquisition costs and marketing which can be more variable?
If you do not have a strong financial background, seek support and guidance from those who do.
You will need financial nous in your business. Therefore, think deal with this.
Make sure that you know your numbers and take time to review historical performance as well as how realistic your forecasts are. At times forecasts should be revised.
If a cash flow problem arises, attend to it immediately rather than hoping that it would go away.
Luke Parker is Online Content Specialist at Westpac. The above article was posted under Red News on the Bank’s website (www.westpac.co.nz) on December 15, 2015.
Photo :Simeon Burnett