Cash flow: The difference between life and death

Luke Parker
Cash flow: The difference between life and death

The ability to generate cash flow in the infant stages of a new start-up can be a deciding factor as to whether a business survives or fails.

With roughly a quarter of Kiwi businesses failing within the first 3 years, it’s important good foundations are laid and the right decisions are made around money.

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The lifeblood of any new businessSimeon-Burnett

Equity crowdfunding platform Snowball Effect’s Co-founder, Simeon Burnett, says one of the classic mistakes start-ups make is not having a clear plan around cash flows.

“A good idea would be to map out the next 18-24 months of cash flow on a monthly basis, run multiple scenarios to get a sense of how much cash you’ll need to get to through, then plan out how you’ll fund it.

"Your forecasts will always be wrong, so it’s important to stress test them so you understand what a ‘worst case’ may look like. Plan for this.”

Things that can cause cash flow issues:

  • Not invoicing sales or collecting debtors in a timely fashion.
  • Paying suppliers upfront.
  • Buying excessive amounts of stock. This is potentially a double whammy as it can also impact overheads such as storage costs. Only ordering enough stock to satisfy estimated sales in your lead time plus a week or two.
  • Under-performing overheads such as staff. This includes a sales team who are not hitting KPIs or marketing that is not generating enough leads.  
  • In the early stages, keep personal drawings to a minimum and use the profits to grow the business. 

 

Loans and credit cards can get messy

Simeon says the reality for most start-ups is that they’re sailing into the unknown, and things cost more and generally take longer than they may think.

"If you don’t have a financial background, see if you can find an experienced mentor who can review your forecasts and plans, and challenge you on how realistic they are."

He says depending on the number of founders the business has, things like loans and credit cards when cash flow is tight can get messy and cause issues down the track.

“If your start-up has legs, chances are you’ll need to bring in a good tranche of capital to get things moving. Get your company to the point where you’ve validated your product/service in the lowest-cost manner possible, then draw up a capital plan to see you through the next 12-18 months.” 

More advice from Simeon around managing cash-flow:

  1. Understand what the major costs levers of your business are. Is it labour costs which are relatively fixed, or customer acquisition costs and marketing which can be more variable?
  2. If you don’t have a strong financial background, seek support and guidance from those who do. You’ll need financial nous in your business, so think about how you deal with this.
  3. Make sure you know your numbers and take time to review historical performance as well as how realistic your forecasts are. At times forecasts will need to be revised.
  4. Set up accounting software like Xero early on and be rigorous in getting familiar with how it works. Make it central to your business activities.
  5. If a cash flow problem arises, give it attention immediately rather than hoping it goes away.

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