When you are starting out in business, you need to quickly grasp that the three key factors that determine a company’s financial success, or failure, are:
- Control of costs
- Cash management
Two out of three simply won’t work – you need to have complete control over these three crucial aspects, otherwise your chances of succeeding in business will be very limited.
The one tool that all businesses can use that bring these three key components together, and monitor their performance, is a cash flow forecast.
STOP! Do not be put off at this point by the fact that we will be considering a few numbers. If you do not have an understanding of the numbers relevant to your business, then it’s unlikely you’ll be in business too long.
Producing a Cash Flow model
A common mistake new businesses owners make is to focus on their particular skills, whether that be in design, marketing, selling etc. and leave the numbers to themselves. But, to give yourself a good chance of success, you really do need have a basic understanding of what cash your sales and costs will throw up, and the effect on your bank balance.
There are a plethora of software systems on the market that provide off the shelf accounting packages that you can use to create a cash flow forecast, but there are free alternatives.
Free Cash Flow Forecast tools
As a start-up, it’s unlikely that you’ll be turning over millions in the first few months, so if you’re handy with spreadsheets you can probably create your own simple cash flow forecast.
Alternatively, to save a bit of time you could either, download ByteStart’s Simple Cash Flow Planner spreadsheet, or try the cash flow forecasting tool from Brixx which has a free option for startups.
One of the big advantages of doing your own cash flow forecast is that it will help you to build a better understanding of your business and the financial effects of your decisions. It will also mean you’ll be familiar with how to update and monitor your business’s performance so can react quickly to unforeseen developments.
Most cash flow models are run on a monthly basis, given that here in the UK we tend to generally operate on 30 day terms. Below is a simple example of the basic information you’ll need (we’ve only used 4 months as an example)
PAYE / NI
Rent / rates
Remember when you are inputting the numbers that this is a cash flow not a profit forecast. You need to make sure salary costs are entered net of PAYE and NI deductions – which will need to be paid to HMRC by the 19th of the following month – and that any VAT liability is usually paid to HMRC on a quarterly basis.
You should produce the cash flow as part of your business planning exercise and once your new business is up and running, update it on at least a monthly basis.
If you have time it’s even better to do it weekly. That way, you will know immediately the likely impact on your cash resources should you encounter anything out of the ordinary.
- Cashflow Forecasting – top tips to produce a better cash flow forecast
- Why financial forecasting is important for startups, and how to do it painlessly
Assuming that trading and cash flows are well under way, here are the next steps to creating a sounder financial footing for your startup;
1. Funding business growth
Unless you are fortunate enough to have a benefactor, then most businesses will fund growth either through generating profits and cash or more likely by borrowing. Borrowing costs money, although currently there has been no better time to borrow with interest rates still being at an all-time low and unlikely to rise significantly in the foreseeable future.
The first obvious thing to consider is what are you looking to do with the funds – that will determine the type of finance most suitable for you.
If its short term funding because there’s a great offer on stock you want to buy, then the traditional overdraft is possibly the way to go.
If it’s for capital assets, then there are many different ways of funding this. We would suggest that you look at the Asset Based Finance Association website which lists all of their members and the services on offer. You’ll also find more help in these ByteStart guides;
- Finding finance for your new business
- How to maximise your chances of securing a small business loan
- A Guide to ‘Alternative Finance’ – the new funding options for small businesses
- 6 Things you need to know before launching a crowdfunding campaign for your business
2. Keep strict control over stock
Another way of improving your cash resources is by strict stock control. The less stock that you carry, the less cash you will have tied up doing nothing. Look very carefully at your customers buying patterns and ask yourself;
- How often do they purchase,
- How much do they purchase
- How much time do you have to deliver?
- Is it possible for you to buy in from your suppliers after you receive the order from your customer?
- If so, why carry so much stock?
If you happen to be in the service industry, then stock may not be the main issue but time will undoubtedly be a consideration.
If you are selling time by utilising your staff on customer projects, look carefully at your terms of trade. Can you get paid ahead of having to pay your staff?
3. Use technology to save cost and time
One of the most recent developments of the 21st century is technology and the use of computers in our daily business lives. How much of your business can you switch from paper to digital?
More and more businesses now are using digital banking arrangements for payments to suppliers and receipts from customers – are you up to speed with that? Not only will it save you bank charges, but all the time messing about with cheques, receipts and banking.
4. Look after your customers
Undoubtedly, the best way to secure growth is by ensuring that your customers are well looked after – customer service has to be at the top of any priorities list – no customers – no business.
Service, price, delivery – make each customer feel that you are making the extra effort for them – not only will you retain them, but they may also make recommendations – after all the best form of advertising is word of mouth – it’s even free!
5. Keep cost under control
Cost control is the other key element – there’s no point have marvelous relationships with customers if it cost you more to sell to them than they are paying you. Understand each and every component part of your business and the relevant costs of each part.
Energy costs are now the most expensive they’ve ever been and they will only continue to climb. A whole new industry has sprung up offering switching services to alternative energy suppliers. It only takes a few minutes to type – switch my energy – into a search engine and you’ll find a whole host of firms.
6. Know your actual profit margins
Margin control is also key and something that a number of start-up entrepreneurs struggle with. Buying something for £1 and selling it for £2 sounds ok, but if your overheads are also £1 you’ll only break even.
You need to constantly monitor costs, given that inflation is nearly always a positive number meaning that costs generally always rise, and be able to react accordingly.
Margin is usually defined as the difference between the buying and selling price – gross margin. This is the number that’s available to pay your overhead costs. Once that’s done you’re then left with the net margin – effectively your net profit.
Gross margin varies from industry to industry, but as a general guide you should be aiming for at least around 35% gross margin.
7. Monitor your competitors and your cash flow
Finally, be aware of what your competitors are up to – their selling prices, new products, marketing campaigns etc. and constantly monitor your cash flow. If left unchecked, they can both kill your business.
About the author
This guide has been written exclusively for ByteStart by Richard Saville a Licensed Insolvency Practitioner, at Corporate Financial Solutions. Richard has over 40 years of experience helping companies large and small who may be experiencing financial problems. He has an extremely broad knowledge across most industries and takes pride in helping to save struggling businesses and returning them to profitability.
More tips on starting and funding a business
ByteStart is packed with help and tips on all aspects of starting your own small business. Check out some of our most popular guides;
- What to do when the bank says “NO”!
- How P2P lending offers small businesses a new funding option
- The 12-Step Action Plan to stop customers from paying you late
- 10 advantages running your business as a limited company has over being a sole trader
- How to choose the best online accounting software for your business