Turnover is vanity, profit is sanity – but cash is king.
You’ve no doubt heard that saying, or a variation of it, on several occasions. But just because it’s a cliché, it doesn’t make it any less true.
If you are starting a new venture with decent resources behind you, you are in a good position. But for most young businesses, using a few tricks to help keep the cashflow going can be as useful as anything else.
Put simply, if you don’t have cash, you won’t be able to trade, regardless of how many other assets you have.
Don’t spend it all at once
Be careful with your initial capital. Whether you’re self-financing or whether you’ve got a loan to help you get off the ground, try not to spend it all before you start trading. However good your business plan is, you will need some access to funds in the period before the money starts to roll in.
However well you’ve planned, you’ll find there are some unexpected expenses. And if you make a loss for, say, the first six months, it is handy to know that you have sufficient liquidity in the bank to get you through the early days.
Tie down your payment terms – both in and out
Once you’ve started trading, monitoring income and expenditure terms is crucial. At the risk of being a bit hypocritical, the ideal set-up for you is to collect your payments as quickly as possible while seeing if you can delay paying your bills for a little while.
Don’t push this too far, though – if you become known as a bad payer, it won’t help you as you try to build up your business. So rather than making your suppliers chase you, see if you can get them to agree to terms of, say, 45 days.
And when you’ve built up a track record of reliability with them, approach them and see if they’ll agree to give you a discount if you pay more promptly.
Putting this into basic terms, the ideal scenario for you is to collect the money you are owed by your customers before you pay your suppliers. Assuming your business is profitable, this is the epitome of good cashflow.
All entrepreneurs know they will need to make sacrifices from time to time, and one of those sacrifices often comes when a business is starting up. If your cashflow is regular from the get-go, it’s fine to build your salary into your costs. But if things are a bit hit and miss to start with, be careful not to take too much money out of the business during the early days.
By Adam Aiken, finance expert for Talk Business