They say there are two things in life that you can be certain of, taxes and death. Well if you’re an entrepreneur you can also be certain of cashflow stress. If there is one thing you need to understand quickly when starting your own business, it’s the importance of cashflow.
I learned about cashflow two ways, the hard way through my own mistakes and from fellow entrepreneurs, who I am sure also learned the hard way first. Most people going into business for the first time don’t understand cashflow and tend to confuse it with profit and or sales. Cashflow is the lifeblood of your business and you have to make sure it keeps pumping especially when taking on new projects that you know will lead to good profit. Taking on new business often requires capital outlay so you need to carefully manage your cashflow while making your cash work for your business. Too little oxygen pumping through the body and you pass out, too little cash pumping through the business and it fails.
Over the years I’ve learned a number of techniques that I use to keep a finger on the pulse of my cashflow. I hope that these 8 tips will prove useful to you in your business.
1) Have regular cashflow projections: I have a weekly cashflow projection uploaded to Google docs and shared with my leadership team. Doing this ensures we all have sight of our current cashflow position on a weekly basis and we know exactly where we stand.
2) Cashflow crunches don’t just happen: If you’re keeping an eye on your cashflow you’re not going to be in for a surprise. If you aren’t it’s likely your business is going to fail. Have cashflow projections well into the future. My spreadsheet on Google docs looks at least 3 months ahead.
3) Cashflow is not your bank balance: It’s great to see a healthy bank balance but keep in mind this doesn’t necessarily imply a healthy cashflow. Reflect your bank balance at the top of your cashflow at the beginning of the new week and then the flow of cash you expect in and out for the weeks ahead.
4) Create annuity income and focus on your customer: Look for ways to create annuity income streams. This will help you get your cashflow under control and give you the room to focus on your customers, build trust and generate new business.
5) Have a cash reserve: Look for a flexible investment vehicle to put money into that you can access easily. For example setup a market link account that you make small regular deposits into on a monthly or quarterly basis. Earn some interest while at the same time keeping funds accessible.
6) Manage your cashflow: As a start up business it’s not easy to get funds, regardless of what your bank says about helping small businesses. You need to invoice promptly, follow up aggressively on overdue invoices, get upfront deposits and stretch for terms with creditors.
7) Identify some key numbers you can track: I got this tip from Norm Brodsky in his book The Knack, he talks about using key numbers in his document storage business to gauge how healthy things are in the business. Being in the same business one of the key numbers I watch on a weekly basis is the number of boxes coming into our facility. If this number drops I know that I need to find out whats going on before it impacts my cashflow.
8) Know what your critical mass needs to be: You need to identify ‘critical mass’ numbers for your business. Your ‘critical mass’ numbers contribute to generating a break even cashflow, so focus on achieving these numbers as soon as possible. As an example a ‘critical mass’ number may be the number of contract customers, the number of boxes in storage or the number of projects.
Always keep your finger on the pulse of your cashflow, even when things are going really well and cashflow is great, don’t stop being vigilant. Use your key numbers to help you predict challenges on the horizon.
Jean Moncrieff is the founder and CEO of the Emerge Group of Companies. The Emerge leadership team is focused investing in individuals passionate about building great businesses that contribute to the growth and sustainability of Africa. Twitter: @eyejean Web: www.emergegroup.co.zaSuscribe to the podcast