- Have a reserve of cash to see you through the first few months
- Don’t be distracted from chasing the cash
- Consider factoring
- Invest in some specialist accounting software or, if you really don’t want to do it yourself, an accountant
If a new company goes bust, chances are that it’s run out of cash. With that in mind, managing cash flow – the movement of money within a business – is a vital skill that any entrepreneur will benefit from learning. Without positive cash flow, your business could have a limited lifespan.
When starting out, things like cash collection and effective invoicing can seem daunting and unclear. Mike Beddington, who set up his customer-experience consulting company in September 2010, found that getting paid was a bit of a headache.
“Invoicing my pay took so long that it was two months until I saw any money,” Mike says. “Fortunately, I had some cash behind me when I started out, so I could keep myself afloat with that until I was paid.
“Apart from my computer, however, I had no set-up costs such as leasing office space or buying large amounts of kit. I’d advise people who do have these outlays – or staff to pay – to be more careful and make sure you can last those first few months where you might not have much money coming in.”
Cash on the brain
Rupert Merson – a chartered accountant and business adviser who runs Rupert Merson LLP – believes that entrepreneurs might have to change their mindset in order to manage cash flow effectively. “Requesting money is the dirty end of business,” he says. “The entrepreneurial mind is geared towards sales, but to be a businessperson you need to run the whole of the profit and loss account and gather the cash in. It’s very easy to get distracted by other things, but cash is reality.”
Managing cash doesn’t have to be a sophisticated process. “Make your own terms as short as possible – why not ask for payment within a fortnight?” Rupert says. “It’s always a good tip to bill your work straight away.”
Expenses, however, can be trickier to deal with. “Invoicing expenses can take about six months,” says Mike, who works on a contract basis for a multinational company. “Expenses take a lot longer than pay to process – and mine are about £5,000 a month – so it’s important to understand how your clients operate.”
A factor to consider
If chasing invoices is hurting your cash flow, then factoring – a form of invoice finance – could be helpful. It’ll let you obtain the majority of the value from your invoices instantly, without having to wait for your client’s payment. The financing company will fund up to 90% of the invoice value upfront and run your ledger for you in exchange for a fee.
Factoring can be useful for new companies as it’s available as soon as you’ve produced your first invoice and doesn’t require you to have produced your first accounts.
Look after the books
Hand-in-hand with cash flow comes bookkeeping, which can be daunting for the numerically challenged. Rupert thinks that most people will be able to handle it themselves with a little help.
“There are dozens of good pieces of accounting software that will make sure you take down all the right stuff, so you shouldn’t struggle along with spreadsheets,” he says.
Mike, though, was concerned enough about the figures to bring in an accountant. “My books were a mess for the first two months,” he says. “My accountants cost about £1,000 a year and they really do pay for themselves. Now I’m on track and more confident about managing the books.”