Cash flow dangers – Six issues that bring a startup down
Tuesday, August 12, 2014/
The first 12 months of a startup is hugely exciting time, but important to your success is cash flow.
Issue one: Slow payment times
Nothing can bring a startup undone faster than slow payment times, and waiting months to get paid for products or services is an instant path to a cash flow crisis.
With the average payment time in Australian business taking around 56 days, the implications for that cash struggle are huge, says Dun & Bradstreet CEO, Gareth Jones.
“Depending on committed outgoings against your income, it can easily have impact on the ability to pay wages, the ability to pay other trade suppliers, and the ability to purchase new products.”
“Those figures show cash collection is the worst it’s ever been in Australia,” says Kevin Moore, retail expert and Chairman of Crossmark Asia-Pacific Holdings.
“And as a backdrop to that, we have startups and SMEs stuck at the bottom of the chain. A lot of large corporations complain about large retailers, but the large corporations are also holding money for smaller businesses. It’s a whole ecosystem where everybody is struggling to collect cash.”
Issue two: Lack of a credit policy
Any startup worth their salt must have a clear credit policy that takes into account the rhythm and cycle of the business, says Jones.
“Establishing a model that says, ‘OK my business needs to expend this amount of cash over a 30-day period, and therefore I need a certain amount of cash in to balance that book’ should be done upfront, as it will help you set your credit policy. This process is absolutely critical, but often it’s not executed properly, or it doesn’t reflect what’s really going on in the business – and that can quickly bring you undone.”
Issue three: Not doing your homework
A failure to perform due diligence sees many entrepreneurs lose sleep at night. And it’s a two-step process.
First, there’s the diligence you need to perform on your own business.
“When you’re in the startup stage, you need to be diligent that every single week you’re looking at your bank account, you’re looking at how much your business is going to cost you, and you understand where your breaking point is,” Moore says. “Those are things you need to look at all the time – if you don’t, you’ll find yourself in dangerous territory.”
Then there’s doing your homework on your customers to avoid potential disaster.
“Doing credit checks on customers is absolutely critical,” Jones says. “This will give you a lot of insight in terms of the risk that you’re taking and allow you to plan for it accordingly, rather than extending credit terms to everyone and ending up in a cash flow hole.”
Issue four: Losing control of the finances
According to Moore, ‘businesses don’t go under because they’re not profitable. They go under because people are not managing their cash’.
Startups often struggle to gain ground in the early days, and it’s okay to be losing some money –provided you’ve done your homework when it comes to your balance sheet.
“If you’ve got a business that’s got the right backing, you can lose money for a period of time – if it’s got the right balance sheet and cash structure available,” says Moore. “But if you lose control of your cash flow, your business is vulnerable.”
Issue five: Taking on bad debt
Bad debt is a killer. And for a startup, putting policies and procedures in place to mitigate risk is absolutely critical. But according to Jones, most startups fail to have a rigorous process when it comes to managing their accounts receivable base.
“When you’re just starting out, if one of your customers isn’t either willing or able to pay you, and you have to effectively write off a significant amount of income (and therefore cash), that can be crippling, based on the size of that customer and the proportion of your income stream or cash flow that it is.”
Issue six: Avoiding commercial realities
“Almost everyone who starts their own business does so because they’re passionate about one thing. But to be passionate about something doesn’t mean you’re a business person,” says Moore.
Which is not to say that you can’t learn those skills. But if you know that numbers isn’t your thing, don’t stick your head in the sand –ask an expert for help, or you’ll be staring down a cash flow hole before you know it.
In the case of startups and finance, ignorance is not bliss.
Written by: Megan Gamble
This article is sponsored by Australia and New Zealand Banking Group Limited ABN 11 005 357 522 (ANZ). The views and recommendations that are made in this document are those of the author and not ANZ. To the extent permitted by law, ANZ disclaims liability or responsibility to any person for any direct or indirect loss or damage that may result from any act or omission by any person in relation to this material..
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