Many Start-ups fail within the first 5 years due to lack of cash. Thus a solid and sustainable cash management to keep up the ability to pay is a ‘must-have’ in the beginning of a business.
As an entrepreneur you are passionate about turning your ideas into revenues to build and grow your business. Without question, numbers are not as exciting as working with your clients and doing the deals. However to develop a successful business you also need to be on top of the numbers and develop financial discipline.
Cash Flow Plan
As part of a business plan a cash flow plan helps you understanding when money is coming in and when money is going out. It is nothing complicated even though the forecasting of revenues is usually a major challenge.
Within a cash flow plan you should find the answers especially for the following two questions:
1. When and how much money do you need?
2. What is the strategy to cover negative bank accounts?
Principally you can build the cash flow plan on the profit & loss (P&L) statement. However only cash relevant income and expenses have to be included i.e. no depreciation or changes in inventories. Cash receipts as pre-payments or loans received as well as disbursements like investments, redemption or dividends paid, that are not part of the P&L, need to be added. Different from a P&L income and expenses are planned when they are expected to be paid. Thus you have to assume payment terms for customer and vendor unless they do not directly result from contracts (loan, lease, employment contracts). This is a crucial task so you should base the plan on realistic assumptions and plan rather conservative than too optimistic. And do not forget to account for customer not paying on time.
Cash Management
I would recommend to set up the cash flow plan on a monthly basis as there could be single months with high peaks due to periodic payments as for example loan redemption, bonuses or taxes. To cover those months you are going to come short you should have a backup plan, at least a credit line for funding of short-term deficits.
Managing your cash flow requires discipline, first of all in management of receivables but also in monitoring the expenses. You should aim for short payment terms with customer and setting up an effective collection process. It never hurts to keep overhead expenses low and make investments when you need them (e.g. equipment) not just when you want a new toy. Finally keep a good relationship with your banks, investors and even major supplier, when the time comes you need to count on them for support.
Cash Management is not a ‘once a year task’ so warm up to it and you can have fun in doing business even beyond the numbers.
