By Jon Smith, author of Smarter Business Start-Ups
In an ideal world your customers would pay you before you had to pay your suppliers, but it rarely works that way. To stay afloat, you need to manage your cash flow.
For sales to take place you will need to order products and materials, supply them to the customer, invoice them and, in many cases, wait to be paid. For this you will need a trading platform (a shop, office or website) and staff, which all costs money.
So how does it really work? You order the materials and services you need and sell them on to your customer, but it is the terms you have arranged with both that will determine your cash flow. Good cash flow management enhances profitability and is a key element in ensuring that your business survives.
Your mission, quite simply, is to try and use other people’s money to cover your expenditure. If you can manage this you will be cash rich and in a very healthy position. If at all possible, obtain immediate payment from your customers before providing the product or service. If, at the same time, you can pay your suppliers over a longer period – usually 30, but sometimes 60 or 90 days – you will have a very healthy cash flow. Crack this and maybe retirement and the front cover of Time Magazine are not so far away.
On occasion, it is possible to spread your banking custom and thus your ability to borrow more. By setting up separate accounts to handle each of your routes to market, such as internet sales, mail order sales or international sales, there is the possibility of creating multiple relationships with banks that will allow more access to lending and credit. As long as the business is not overstretched, and the loans are overdrafts that can be covered by the revenues from each of the sales channels, you are not breaking rules, just giving your business more options.
By definition, a new business has no track record and no sympathy from the firms it deals with. Even if you are bringing years of personal experience to the party, the sad truth is that when it comes to paying bills you will be hit the hardest in your first year. Suppliers may demand that your first order is paid for pro-forma (in advance). The bank may be reluctant to grant the overdraft facility you require.
Much, if not all, of the business machinery must be purchased and you will pay deposits on your premises, hire-purchase items and other leases. In short, your first twelve months will be expensive, but you need them to be cheap until you get your income up.
The net result is that you may need to earn much more in your first year than in subsequent years just to break even. Budget for being taken to the cleaners in your first year; the business world, it seems, is geared up for making the life of a start-up as hard as possible. The trick is to make it through to the other side and start earning more than you spend. You must make the difficult journey to the fabled world of profitability!
It’s time to put your negotiating powers to the test and try and get the most favourable terms for your business. Although you will have trouble convincing your suppliers in your first year to give you any special dispensation over and above their standard terms, there is no harm in asking. Whatever their terms are, be sure to pay up on time; if you don’t, you are asking for trouble.