Steve Parks

How to Fund Your Business: The Essential Guide to Raising Finance to Start and Grow Your Business author: Steve Parks asin: 0273706241

If you've read any of my books, particularly How to Fund Your Business, you'll know that I keep hammering home how important it is to manage and monitor your cash flow.

Cash is the fuel for your business - and you wouldn't want to be in a plane when it runs low on fuel. The same goes for your business.

All entrepreneurs tend to learn this hard way (me included). I've had some very sleepless nights in building my businesses, and I've met multi millionaires who nearly lost their businesses to cash flow problems in their early days. In about my second year in business the European Commission (who I had been delighted to sign-up as a client) took 9 months(!!!) to pay me £14k, which nearly killed me, let alone my small startup business.

Cash flow problems can even happen once you've grown the business: instead of worrying about a client being late paying £5k, you worry about them being late paying £50k, or £500k!

So I was very interested to read the blog and some articles by UK internet entrepreneur Ryan Carson about the subject.

He started out with Small Biz 101: Cash Flow in which he gives his 7 tips for healthy cash flow:

1. Spend as little as possible
2. Don't buy stuff you don't need
3. Be brutally realistic when it comes to planning - plan for the worst case scenario
4. Chase invoices the minute they're late
5. Update your cash flow regularly
6. Cut expenses as much as possible
7. People don't always pay on time

These are all great tips, and notice how often the subject of keeping costs low comes up? It's so important not to whizz out and buy a fancy car as soon as you get your first big client, or to rent fancy offices from day one. Many of the best businesses started out being run from a kitchen table or a garage, only moving into (cheap) business premises when they really had to and the income justified it.

One of the commentors on Ryan's post, Brady Joslin, then gave some excellent advice:

I think one important note to add here is that a company can be profitable, but still run into cash flow issues. Timing of incoming and outgoing payments is crucial to the health of a company.

I’d also add look out taking up debt when starting a company. Keep aware of the payback schedule. Betting on future profits to cover future repayments can be a risky proposition, and can knock the feet out from under the company as it comes out of the gates.

So from that great advice, Ryan has now gone on to ask readers of his blog How much cash do you keep in the bank at any one time? The survey was anonymous, because Ryan wanted to get a feel for how much he should keep in his account, and how much he should invest in building the business by comparing what other companies were doing, but obviously people are wary about revealing such things! Anyway, he's just posted the results in which he found that most small businesses that responded have less than 10 team members and keep less than $10k in the bank at any time.

The findings are quite interesting, partly because they show how much the tech industry has changed: from comparing 'burn rates' (how much more cash they were spending each month than sales income!), to comparing how much they keep in the bank for a rainy day. It seems that the web industry hs matured, and I think that it will produce stronger businesses as a result - businesses built on sales, with a proven customer base. More entrepreneurs are starting snall, not taking on lots of debt or outside investment, and just testing out their idea without much risk - that is, after all, the beauty of an online business.

Also of interest are the comments, because the general feeling is something that I agree with: The aim should not be to keep some arbitary sum in reserve, but to build a specific financial buffer. So you could decide to keep 90 days worth of funding in reserve - so you could survive and pay all your bills if you didn't get paid anything for 3 months. The actual amount you keep would then increase as the size of your business increases.

One person even suggests that you shouldn't even start a business until you have saved up enough or raised enough to fund you for the first 6-12 months with no other income. That may mean you never get started though!

Of course, once they are launched, many start-ups lead a hand to mouth existence in the first couple of years, desperately chasing in money from customers that just goes straight out to pay bills. This is stressful, but it teaches you a lot about the skills of cash management - and those skills will be the best thing you ever learn in business.

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