It doesn’t matter how big or successful a business is, without maintaining a good flow of cash throughout the business, it will collapse. Cash is key, it is the lifeline of any business, it doesn’t matter how many sales the business is making, if it can’t pay outgoing costs as and when they fall, naturally the business will fail. It could be down to one bad month, or one bad debt, which sets the business towards a negative spiral of always playing catch-up.
For startups, maintaining a good flow of cash can be even more difficult, as predicting ahead is much harder. However, there are common cash flow problems which normally cause startups to slip up.
Common cash flow problems for startups
For a lot of new businesses, it’s simply down to timing. This could be late paying clients, or too many bills coming out at the same time, primarily it’s when the business doesn’t bring in enough money quickly enough to cover its outgoings payments. Even if there are plenty of sales being made, unless those payments are made on time, businesses will struggle.
Sometimes cash flow problems just can’t be stopped. Although it’s key for a business to try and plan ahead, if an expensive piece of equipment breaks unexpectedly, it could set the business back substantially as it tries to cope with a large cost. Alternatively, there could be a large spike in inflation within the marketplace, severely increasing certain costs.
One of the most common reasons for cash flow trouble, is through not creating a forecast. As a startup it can be difficult to create forecasts, as there is previous sales history to go off, however, a business should still be able to make a good estimate of where it’s money will come from and exactly what should be coming out. All the incomings and outgoings have to be included, with other long-term issues included, such as how the business will pay back its initial startup costs. Seasonal variations also have to be included, does the business rely on certain months to survive, will it have enough for the remaining months of the year?
How can a new business be efficient with incomings and outgoings?
Startups need to be constantly assessing and developing their cash flow forecast as the times change. The idea of controlling how much money goes in and out of the business seems like an easy prospect but in reality, it’s a much harder task. However, there are a few things which businesses can do to ease outgoings and improve incomings.
- If necessary follow up on late paying clients and be assertive with them.
- Carry out credit checks on new clients, assess their history and likelihood of on time payment.
- Incentivise clients with discounts, or special deals if they pay early.
- Collect deposits from clients and try to make it the business norm.
- If beneficial to the business, pay on the last day of any outgoing repayment terms.
- If dealing with regular suppliers, but the business is having difficulties with cash flow, get in touch and talk about any problems, importantly try to arrange a different repayment date.
Clients more often than not will be unreliable with payments and end up paying late. So, it’s vitally important that a business stays on top of them. This does not mean haranguing clients, but giving them a gentle nudge if their payment is delayed, this can be done through an email or a simple phone call. Although this is no guarantee of payment it can certainly push clients in the right direction. Pushing for payment is all the more important if the business relies heavily on one client, or just a couple.
Before the business even makes the decision of working with a client, it’s important that a credit check is carried out. This can help determine, how likely it is a client will pay and how efficiently they will do so. If a client has a bad credit score, it might be worth considering if they would be good to do business with. If a client is worth trading with, offering an incentive for on time payment can be a great way of helping to ensure clients pay within a good time frame.
Bringing in some money, is better than not. This is why asking clients for a deposit can be hugely beneficial. The quicker money can come into the business, the easier it is to make outgoing payments. Although clients might be hesitant at first to make a down payment, it would actually break up their payment and could make it easier for them to complete things at the end of the contract.
When it comes to making outgoing payments, a business needs to be sensible itself. If and where possible make full use of repayment terms, if it will be beneficial to the business to pay on the last day of the month, then be sure to do it.
What can a startup do if it gets into trouble?
If a startup gets unlucky and slips into trouble with cash flow, it might seem highly unlikely that it can get out of trouble, but in truth there are solutions available.
Invoice financing can be an excellent option for B2B businesses, if in trouble, it can really help steady the ship. If late paying clients are the main issue behind cash flow troubles, invoice financing effectively allows the business to obtain an advance, based on the value of the invoices from those clients.
A factoring company would first assess the quality of the invoices, including the potential risk involved. If the factoring company were to deem the invoices acceptable, they would advance the business a percentage value of the invoice. After this the factoring company will go ahead and collect the payment from the original client, take back the money they are owed, along with their own fees and then give the change to the business. As well as easing cash flow for a business, it also enables owners to be able to spend more time working on the business instead of chasing down clients for invoices.
A business overdraft can be an efficient way of covering large costs that the business perhaps wasn’t expecting. It means a business is able to have funds available, even when the account becomes goes overdrawn. The amount which is available to the business, will first be agreed with the bank. It will be created to meet the needs of the business and will be dependent on the length of time the business needs the facility for. However, the longer an overdraft is required for, the more likely it is the banks will require security.
One of the more common means of businesses pulling in additional sources to help with cashflow, is a bank loan. However, this is normally a last case scenario. Banks naturally are hesitant to loan to businesses who are in cashflow trouble, especially startups. But if a business is able to prove that their model is viable and the business has simply been hit with bad luck, then sometimes banks will be willing to loan.