Spring into Business - 7 key steps to getting it right

Every year between January and March some 120,000 new companies are incorporated. Fifty percent of these new companies have a single shareholder and director who is starting a business. They all start a journey which will be successful for 30% of them in the long term. Managing your cash flow in three simple steps can make all the difference.

Contrary to popular believe the first year is not when most companies starting a business fail. Seventy-five percent of all businesses survive in the first year and of those survivors half drop out during the next six years. The non profit organisation Small Business Administration lists from their research seven key success factors:

1. Start for the right reasons
2. Good Management
3. Sufficient Capital
4. Location, Location, Location
5. Sufficient Planning
6. Sustainable growth and expansion
7. Have web presence

Their research shows you need to be successful in many areas to be a successful entrepreneur. However, there is one common area of failure, Insolvency Helpline UK states on their website:

“50% of all failures are caused by cash flow problems”.

When starting a business many competing priorities need to be dealt with and Brad Rosser previously right hand man from Virgin’s Sir Richard Branson suggest in his presentations:

•    Pay a little bit more if it means you can spread-out payments
•    Spend the cash on items that bring in cash and not the back-office

Step 1 of managing your cash flow is to use common sense to reduce cash
payments upfront. My own experience shows that even commercially successful
businesses can go under if cash is not managed properly:

“During a statutory audit I discovered that the bank balance was
depleted, although the accounts suggested otherwise. Then many unprocessed
invoices were found. Blissfully unaware seminar organisers were
overspending, running down the cash and not making any money. The fast
growing business was virtually bankrupt rather than beating forecasts.
Indeed you can choke a successful business by growing too fast and not
managing your cash flow.”

Ask a Chartered Accountant about maintaining your cash flow and he will
explain you need to have a good set of accounts and that includes knowing
your outstanding invoices/costs. That is step 2 to manage your cash flow.

The 3rd and most important step in addition to common sense and good
accounts is to prepare a forward looking cash flow. Out of your projected
cash flow you can determine if you need to look for financing or if you can
manage it from your own cash flow. The best part is that by “playing
around” with assumptions you can optimise your financing and therefore
your profit. Three simple steps to manage your current and future cash flow
and you are much more likely to succeed when starting a business as a
result.