The startup and development stages of a business can be challenging, not least because of finances.One of the key tasks as a new business owner is making sure that you manage your finances well. In fact, bootstrapping – the act of starting a business without or with very little external help or capital – can be an incredibly effective way to ensure a business’s positive cashflow.
Often, a startup is run on a minimal budget, and as such effective cash flow management is key. You don’t need to be an accountant to manage your cash position, but you do need to be aware of some key statistics within your business to ensure that a downward trend doesn’t leave you with more month than money!
There is an often repeated phrase in business, which you might have heard before: “Turnover is Vanity, Profit is Sanity, but Cash is King”. This saying highlights a key area that some new business owners forget: ultimately, your staff, suppliers and landlord will need paying, and cash is vital for the health of a business.
One of the first areas that business owners get confused on when it comes to financial matters is the difference between cashflow and profit. Did you know that a business could have £150,000 profit on paper, but be overdrawn with their bank and struggle with cash flow? Once you have an understanding of the differences, it is obvious, however many entrepreneurs don’t immediately understand this area.
There are a number of items that may be included within a profit and loss account that may not be directly reflected in your bank account. If you make a trade sale to another business, it would often have payment terms attached, and as such you might have to wait 30 days to get paid. Similarly, you would have payment terms on your purchases once you are an established business, and again your bank account wouldn’t reflect these expenses until the payment is made. This would all need to be considered when planning your finances in the early stages of a business.
As the popularity of bootstrap businesses shows, starting a business doesn’t have to cost a lot. This is especially true if you already have most of what you need. That said, by very nature, startups and new businesses usually have to spend a fair bit to get themselves set up. They need to purchase equipment, collateral, branding, perhaps premises – but as long as this is carefully budgeted for and factored into future plans, this shouldn’t be a problem. Keeping a strong awareness of your outgoings and stacking this against what’s coming in is key to ensuring you don’t run into problems.Hiring staff can be a massive cost, so I would recommend holding off doing this until absolutely needed.
Besides this, however, the first thing to remember about working to a tight budget is that it doesn’t necessarily mean not spending. It’s not about cash splashing; it’s about strategically and carefully choosing where to put your money. It’s about being lean, not mean – and this needs to happen from the start. Ditch the extras, focus on the essentials.
For some businesses, investment in a high-spec laptop might be a vital piece of kit. For others, they might only need a few low-cost items. What you need to work out is how to spend with careful discernment. Do you need every bell and whistle that is offered with a product? No, probably not – however bear in mind it needs to be fit for your business too. Don’t scrimp if it’s going to affect what you can offer your clients – because with no clients, you have nothing. That can be the make and break of a business – spending money where it matters and adds most value for you and your clients. Economise where you can, but don’t sacrifice your business and values.