As a start-up business, chances are your cash flow is tight and you haven’t managed to secure financing. Don’t worry, you’re not alone. In fact, these are the biggest challenges most start-ups face: how do I manage my cash flow and get customers to pay on time? And how do I access funding?
The reality is that most banks will not lend to a start-up within its first three years — the risk is simply too high. This is hardly unique to South Africa, but rather a global phenomenon.
Related: Smart business, flexible business
That said, Clive Pintusewitz, director: Small enterprise and enterprise development at Standard Bank, admits that there is more that banks can do to assist the start-up market.
“It’s a delicate balance,” he says. “On the one hand, many start-ups simply do not have the financial acumen to manage their finances well enough to mitigate the risk banks take lending them money. On the other hand, I firmly believe there is more that we can do to facilitate lending to start-ups and SMEs.”
In order to close this gap however, it is essential for start-ups to improve their financial management skills. Forecasting and cash flow are essential.
If a business owner can prove their model will work, and show they have an intimate knowledge and understanding of their business and its finances, they immediately reduce the risk of lending them money.
Mitigating business risk
“Every business will have cash flow gaps in its first 12 months,” says Pintusewitz. “This is inevitable. However, it is possible to forecast where those gaps will be. If a business owner does that, the business loan is still risky, but it’s predictable. Often we are only approached after problems have manifested themselves, which is an immediate red flag for us.
The fact that the gaps occurred isn’t the issue, but rather that the business owner did not have enough of a handle on events to predict the gap earlier and therefore make provision for it.” (See case study on page 69 for an example of cash flow forecasting).
Accurately forecasting cash flow issues is not only useful for securing finance however. Good business and financial management will ultimately lead to growth — whether or not the business secures finance.
Pintusewitz offers ten key areas that start-ups should focus on for healthy cash flow.
Don’t spend ahead of revenue
”This sounds obvious but we see businesses doing all sorts of things. For example, start-ups often believe that they need to create a professional image, and so they take 200 metres of A-grade space in Sandton, get locked into a two year lease, and then aren’t able to pay their rent because the contracts haven’t flown in as expected. It’s a death knell for a start-up. Flexibility is vital.“
Get your revenue in and bank it
There is no substitute for this. Manage your debtors from the first contract you get. Make sure your clients pay you properly.
It’s about control
“We always say retail is detail, but this is true of any business – you need to know exactly what is happening in your business: your stock; your staff; money in the bank and money owed you; who you owe; what you will gain by paying your suppliers at different times etc.”
Understand your market
What are your risks? In other words, do you stock perishable goods? Is your business power hungry? What happens if the lights go out? Do you rely on trends? You need to know your market to manage your business properly.
Check your finances regularly
How can you coincide when you are paid and when you pay? The closer you can get those two working together, the better off you will be, and the more positive your cash flow.
Understand gross versus net profit
You get goods, you mark them up, but you don’t take all your own costs into account, and by the time you have taken everything into account, you are actually losing money.
Don’t rely on a few big contracts
If one of those contracts doesn’t pay you on time, can you survive? It might be more prudent to turn down a big contract in favour of a few, less lucrative contracts.
It might be a R1 million opportunity, but what happens if they can’t pay? Perhaps you should rather only take R200 000 of the contract, and spread your risk across other smaller contracts. Very few entrepreneurs manage this well — they see the bright lights and go for it, without managing the risk.
Do due diligence on potential clients
Don’t just take a business at face value. Investigate its credit record through a bureau like Experian or Transunion, and speak to other clients to find out what they are like to work with, and whether they pay on time. A bad client can kill a start-up.
Many start-ups grow faster than their cash flow can support. Your profit is going up, but profitability is going down because your expenses are higher than revenue. Before you make the decision to invest in growth make sure the resultant revenue is greater than the costs. If it isn’t, wait.
Make sure you see the full picture
You do need to grow, but understand how the growth will affect you — and then you will be able to grow at the appropriate times. Don’t assume that the revenue generated from growth will cover the additional costs.
Related: Are you measuring up to your board?
It’s important to understand risks and make educated decisions. Cash flow is vital to a start-up’s survival, and healthy cash flow can only be achieved through an intimate understanding of your business and your market.