Why is it so many start-ups fail? With half of new SMEs out of business by their fifth year and 70% done in a decade, it’s one of the key questions in modern industry.
Perhaps it’s a lack of a defined USP or the inability to build a steady client portfolio? It might be down to an absence of a true business plan heading into a saturated market. For many start-ups, however, the end comes down to simply running out of money.
Cash flow issues are the second biggest reason for start-up failure behind a lack of market need, but this a problem that is potentially avoidable with better planning and organisation. Here’s how to keep the money from drying up in your new venture.
Control Your Spending
Go hard or go home, so they say, but that shouldn’t apply to your spending plan. Of course, every business intends to achieve success and profit through expansion of its commercial offering, but stretching yourself too far, too soon can mean big issues for cash flow.
When approaching business spend, it’s important to identify priorities, create realistic goals and stick to them, regardless of the temptation to go big on investment. A lot of good cash flow management comes down to timing, so understanding when and when not to take on new projects is key.
Save for the Unexpected
A benefit of good spending control is allowing for contingency in an unpredictable business world. Being able to fall back on a substantial cash reserve in the face of unforeseen circumstances will take a huge weight off your mind and allow you to focus on moving forward.
Just as in life, business has a habit of throwing unanticipated hurdles in the way, and not being prepared for the unexpected has derailed many a start-up venture.
Related Reading: Have You Planned Emergency Funding for Your Startup?
Get Ahead of the Ledger
A stark reality of professional life is that profit does not necessarily equal cash flow. Despite the health of your P&L, a lot of that money may well be sat on the sales ledger, yet to bolster your coffers.
Late payers and bad debts are a matter of course in business. Start-ups must therefore do what they can to get money owed in as quickly as possible, and there are a couple of ways to do this.
The first is to offer pricing discounts in exchange for early payments. Whilst this may impact your profit margin, it will boost your cash flow management significantly, with your customers incentivised to get payments in ahead of the billing cycle. A small dent in margin is a potentially worthy trade off for buoyant cash flow.
Secondly, SME’s can seek an advance on their ledger via a supplier providing invoice discounting. Confidential invoice discounting (CID) gives SMEs a guaranteed and substantial cashflow solution by offering immediate access to cash tied up in unpaid invoices.
Again, you will have to sacrifice a slice of your profits to supplier rates, but CID can provide a palpable solution in times of need for a cash strapped start-up.
The Bottom Line
Managing your cash flow correctly really comes down to discipline, solid planning and exploring the options available to you. All, in theory, should be easy to practice, but the unpredictability of business means it’s easy to slip up.
Always remain lucid on business goals, and make sure you work within your resources and you’ll stand a much better chance of start-up success