Money talks, Bullsh.. walks
We know, we know, you have heard it over and over again. Cashflow is important and you need to have an eye on it, bla, bla, bla.
Well, if everyone knows how important it is for a business, why are so many businesses still struggling with it all the time?
We are going to be blunt about this. A lot of people don't want to deal with it or find it too hard to stay on top of it amongst everything else they are doing already. It is not a sexy topic to deal with but ensuring a positive cash flow is crucial for a business, not only to grow but to survive.
Borrowing money from the banks, family, and friends or just getting another credit card (because all the others are maxed out) may work for some but what happens when these options are no longer or not available?
One thing should be clear. Starting a business is an investment and not only of your time and effort but money, a lot of money just to get it off the ground plus the ongoing costs of running a business before you start making money from it.
A lot of people underestimate how much money they need for the business and also make a living at the same time. The last thing you can expect is making an income from the business straight away and if you do, it is great. We can't expect that everything will go to plan but we can prepare for it. Here a few things that people should consider before they start:
1. Create a cash buffer to get you through a few months without income and keep it separate from your personal finances. Your personal funds are for your living and not your business's. I know we want to make this work and it's only a few more dollars to pay for that bill and if you don't eat for a few days it's not that bad. However, the more you mix personal and business finances the more you get stressed. The impact it has shouldn't be underestimated. Even though most of us can probably cut down on things in our personal lives and invest more into the business, people tend to literally put every dollar into their businesses. The risk is that you create a cash flow issue not only in your business but your personal life as well. When you have put everything on the line and have no other way to go you end up broke and hungry.
2. Prepare a budget for a minimum of 3 years. I can hear a lot of sighs right now of people thinking how boring, how much time this will take or how much they hate using spreadsheets. I personally am not the biggest fan of spreadsheets myself and the less the better, but this can actually be exciting. Sounds weird, but look at it from this point of view. You get to dream about the numbers you want to achieve and putting them down on paper is the first step towards achieving them. Imagine how exciting it is when you hit these numbers and they are not just dreams but reality? You should write down all income and split it by services or products so you forecast which area you want to put your main focus on to get the most income. Put down a little less than you think so it is achievable and reasonable. Set low expectations and rather over deliver. Then write down all expenses (e.g. software, tax, production costs, rent, insurances, etc. and don't forget about all the small expenses that add up) and always put a little more down than you think. We cheat because we want the bottom line to stay positive but that is unfortunately far from reality. This will also help you to see how big your buffer should be until the bottom line turns positive. This can take a few months so don't get too stressed out about it.
3. Prepare a cash flow forecast. Once you know what your budget looks like and have your cash buffer worked out it is important to forecast your actual cash flow. Often the issue for businesses is that they don't actually know when to expect money or clients don't pay on time, the payment conditions are too long or other factors. On top of that businesses don't know when to pay their bills and what might come up like tax or Super and expenses that only occur every couple of months. If you don't know when and how much you need to pay how do you know when you are running short and risk not being able to pay? By forecasting, you can work out when you can put money back into the buffer for rainy days or how much you need to put aside to be able to pay for expenses that might be a few weeks or months away. And no, the money put aside for this is not to be used for anything other than it is allocated for! When you start putting money back into the buffer and this money is not allocated towards any expenses, is when the business starts being healthier because you have money that you can either invest to grow or finally start paying back the money you lent the business. Be very detailed with the forecast and keep actuals vs forecast at all times up to date. Do it at least weekly if not daily and always know your bank balance. The spreadsheet can be designed to keep track of your balance by entering the transactions but make sure to check against your bank account regularly. A credit card should best be paid off monthly to avoid the interest and you don't risk to max it out. You also know how much and when it will be debited from your bank account to help with the planning.
When you start implementing these few steps you are one step closer to a healthy business and less stress. It always starts with a lot of effort but once it is done and you get into the habit of keeping it up to date and use it, it is a lot less maintenance than you think. If you don't want to do this yourself you might want to think of hiring someone that can do it for you but remember to add the expense to the budget...
Disclaimer: all information contained within this article is of a general nature and should not be relied upon when making business or financial decisions.