I’m not an accountant. Hell, I hate numbers and spreadsheets most of the time. In school I was good at maths, but got average results because I could never show my workings - that doesn’t bode well for writing up a P&L (profit and loss) or cashflow sheet at all.
So, why do you need to care about your cashflow? Business is just selling something for more than it costs you to fulfil it, right? Well yes, but when you factor in the way you pay for things and the times between payments coming in and going out, that’s when things can get tricky.
Take this example; for a year I ran a clothing company. I was naïve and thought it would be easy (although in hindsight it probably would’ve helped if I actually was passionate about fashion and clothing - live and learn eh?). But it wasn’t and a lot of that was to do with cashflow. In theory, buying a t-shirt for £2, printing on it for £1.50 and then selling it for £15 after delivery costs would make a healthy profit - you’d just need to keep selling more t-shirts.
Then you start to factor in that you’ll need to buy a minimum order quantity of 100 t-shirts per design and you’ll need at least five designs to look like a reputable retailer, the costs start mounting before you’d even sold anything. Then factor in your marketing costs, delivery and - if you don’t start with a surplus in the bank account to give you wiggle room for spending - you’ll be dangerously close to going out of business.
Needless to say that business failed miserably and it was probably because any company I’ve ever founded (I’ve had six so far) has been created using absolutely no money.
How?! How do you start a company with no money? And, what does that do to help lower your chances of going out of business?
Without a positive cashflow you have a business that is teetering very close to the edge of troubled waters.
Well, starting a company with no money does lower your chances of going out of business because you’re not spending anything - great! However, it does vastly slow your rate of being ‘in business’, profitable or sustaining yourself with a wage, so it is a rather annoying way to start, although, yes, it is low risk.
I’ve never come from money or had much to spend, so it’s been good practice for me and helped me to learn techniques that I hope to pass on you to help you grow your business in a lean way, so that when you do have cash in the bank you’re more careful about spending it effectively, especially in the early stages.
Tip 1: Leverage and trade
Anyone you want to do business with wants something. Generally, this falls into two categories; resources and power.
If you’re trying to grow your business and are able to produce products then these products are going to be a fraction of what you hope to sell them for (well, they’d better be or you probably need to reassess the business altogether). This puts you in the position of hopefully having something people want and the ability to supply it, cheaply to exchange for value.
If you’re selling camping tents for £200 that cost you £30 to produce and you need some graphic design work done that would usually cost you £200, then perhaps try to exchange one of your tents for the work - if your graphic designer loves camping then you’ll get £200 worth of work for £30 plus you’ll get the added benefit of having a new brand ambassador who will show their friends their new tent.
It can be hugely advantageous to kick start your business by building up a community around your product or service first.
The truth is that the £200 that person was going to charge you for their work is likely to be inflated anyway to allow for profit. So they’ll likely actually feel like their breakeven point is, say, £120. So subconsciously they’ll feel like they go £80 of extra value and may even love you more for it.
Another way to operate is to trade your contacts. If you don’t have the revenue to buy someone’s product or service, but you know someone else who does and needs it, then suggest making that introduction on the basis you get something in return.
Generally, I like to do this first and then ask for favours afterwards as people are often happy to help in return rather than feeling part of a business deal, but it can be an effective way to get things for the cost of just one email. If someone is looking for £100,000 in investment and you know a millionaire who’s looking to invest, then that has huge value for both parties and they’ll generally feel they owe you something for connecting them afterward.
Tip 2: Pre-sell
If you can, it can be hugely advantageous to kick start your business by building up a community around your product or service first and then selling the products to them before they’ve even launched, perhaps at a preferential rate to those who have chosen to take the leap of faith with you.
Of course, you’ll need to follow-through with the orders and use this to your advantage to meet the anticipation people have had 100% worth the wait by over delivering and this will help create massive brand advocates from day one.
The truth of the matter is that everyone is protecting their own cashflow. They know you need payment as soon as possible.
With the mentality of the Kickstarter generation, people are able to do this more and more with companies like The Grid can get over 20,000 “founding members” paying $100 each before even releasing their product based on the back of just one video. I’ll let you do the maths on that ;)
There is a double edged sword though as you must deliver in good time, with the anticipated quality or better. As, in The Grid’s case, this can backfire after they kept founding members waiting for over a year and what they delivered was still a beta version (understandable), but with that many people coming on board, the PR was absolutely terrible and, upon re-inspection, still is.
Tip 3: Set out your ideal payment terms
It’s absolutely crazy that people just tend to follow the age-old expectation of 30-day payment terms, which invariably end up being 60 or 90-day payment terms if companies feel they’ve enough power to get away with it.
In running my agency, one of the biggest impacts we had on our cashflow came from one of the most simple of changes and now I advise everyone to do it right away - set clients up on a direct debit, or send invoices with immediate payment or payment on receipt terms (or the least you can get away with).
The truth of the matter is that everyone is protecting their own cashflow. They know you need payment as soon as possible. They’ll probably take as much leeway as you’ll give them, so if you set 30 days they’ll test how long it really is until you chase. Set it to that very day and chase the day after and you’ll see that the payments come in much faster. Or, if you can make it work for your service (or even product, such as subscription boxes etc.), set direct debits.
This regular income will help you sleep better at night, knowing what will actually be in the account the next day, week or month, and you’ll be able to budget better and build your business faster as a result!
The crux of the matter here is: cashflow is king. Without a positive cashflow you have a business that is teetering very close to the edge of troubled waters. Your customer matters of course, but it’s your business and you’re setting the rules. Do that right and your cashflow could be the reason you fly and not fall.
About Ash Phillips
I founded YENA a network for young entrepreneurs and ambitious professionals. We connect people via events and online services in order to improve their number of opportunities and chances of success.
Our primary demographic is 15-35s but we deliver services to all levels of business, and individuals through our member events which are completely age/business size/sector agnostic.