If there is one work-related nightmare that causes me to wake at 3am in a stressed sweat, it is the fear of running out of cash. We’ve all seen the data regarding the remarkable failure rate of start-ups (90% by some accounts), but most don’t know that it is usually the result of one thing: cashflow management. Entrepreneurs are optimists by nature, but many early stage founders forget to focus on the one basic lifeline they need to stay alive.


To help manage what is often an intimidating topic, I wanted to share learnings from decades of reading and worrying about cash in the bank.


Dafna Bonas, Founder, Indie Bay Snacks

1. First, there are two universal truths that anyone starting a business must never forget:
– You will burn through your money faster than you think
– Raising money will take longer than you think
With these as guiding principles, start by understanding what will be the main outflows of your cash (what you will be paying for) and the inflows (what will be flowing in, for how long, and how often.) Both money flowing in and money flowing out might be on a smooth, regular schedule, or may be in significant lumpy chunks which will require forethought.
Research into SMEs and the particular risks we face found that 55% of people who own small businesses said they could cover only a single month’s business expenses with their savings, and 30% had no business savings at all. In fact, 41% of respondents said they couldn’t cover an unexpected business expense of even £1000 and would have to tap personal savings, and 15% said they could not cover such an expense at all.


2. Build the projections and budget yourself. It’s tempting to ask someone else to build the projections and model for you, but those early assumptions are critical to the business plan. Stay hands-on when creating the first plan; it is the only way to ensure you understand every line and can make the adjustment needed as the business evolves. I’ve found that I never fully understand the financial plans as well if I haven’t been involved in the first building of the financial models.


3. Fight for best payment terms you can get as a young small business. If you don’t ask, you don’t get. You know that. Better terms that allow you to collect sooner but pay out later make a material difference on the cash flows of your business, so try at every opportunity. Once terms are agreed, make sure your systems are set up to collect quickly but pay only when agreed and when you must.


4. Allocate correctly. We spend a few hours every month ensuring that actual line items are allocated to the right line item in our budget. This seems quite simple, yet as more people join your team, there can be differences in judgement in terms of how to correlate certain costs or revenue sources. You will not be able to draw the right conclusions from tracking actual progress relative to your plans unless you allocated correctly, and doing this retrospectively takes so much longer.


5. Revisit and adjust. Assuming you’ve tracked actuals costs and revenues properly and are allocating them to the right lines in your budget, then you’ll quickly start to see patterns emerge. These may indicate that some early assumptions are incorrect, that there are trends (are some weeks better or worse every month? Do you see a seasonal swing?) or that things are going more quickly – or more slowly – than you planned. Revisit your budgets and the implications to your cashflow and make the adjustments you need to realistically predict cash needs.


6. Leave room to manoeuvre. Things don’t always go as planned and having a cash reserve to allow you to withstand unexpected challenges or capitalise on opportunities can make all the difference. Wherever possible, leave yourself a cash reserve that will allow you to make smart decisions rather than ones of distress. By keeping some emergency funds in reserve, even if that means growing your business more slowly, you can realize your vision for your business and remain resilient as the unpredictable happens.


There is an inherent tension between the necessary optimism required for entrepreneurs to take on the daunting but exciting challenge of starting a business (you must be a bit mad to believe you’re the one to beat the odds!) and the pragmatism needed to ensure cashflow does not bring crisis to a business with potential. When it comes to managing your cash needs and flow, however, it is critical to stay practical, realistic and honest. Don’t stick your head in the proverbial sand – it is just not worth the risk.


Dafna Bonas, Founder and CEO of Indie Bay Snacks

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