MANAGING CASH FLOW DURING BUSINESS GROWTH

MANAGING CASH FLOW DURING BUSINESS GROWTH

Why should you worry about cashflow when your business is growing? In a time where you’re making money, you may not worry about cash flow, but actually this can be fatal to many SMEs.

Well, on paper – yes, when you are growing, you have more income… but in reality, things can get messy.

This article is here to:

  • Help understand the interaction between cash and your business growth;
  • Give some guidance on how to best manage your cash, to ensure a smooth business growth spurt.

We’ll start with the first part: How business growth impacts cash reserves and vice versa. Let me tell you a story:

After uni, when we were all applying for corporate roles, one of my friends decided to start her own business. A HR company in the field of R&D: her idea was to introduce the best post-grad and PHD students to biotech firms.

After struggling for about a year, she started to land some contracts and build her credibility in the sector. By year 2 she was already hiring her own team. She was working hard, growing fast and expanding her company. New office, new computers, team members…

She was buzzing; we were so happy and impressed for her. One day we met up for a coffee and she asked for my help, as she was about to go bankrupt. I will never forget her telling me…

“J, the money is there, but it’s not there,”

ME: “What do you mean Manu?”

“Well, I have 150K outstanding with my clients, but the due date is in 90 days … And I owe money to my suppliers today, actually since last month. I cannot hold them off any longer”.

What had happened was, as she was working with big corporate companies, and they imposed their very long payment terms (90 days in some cases).

On the other hand, she was working with small suppliers who had maximum 14 days payment terms. And on top of that she had employees and other monthly fixed overheads. Although, virtually she was earning enough money to cover all those expenses, she had no cash in her bank account.

Fortunately, she was able to inject external money and save her business. Emerging from that tunnel, the very first thing she did was to amend all the payment terms with her clients and suppliers.

This is a very common growth problem. As you grow your company, the company needs more investment because:

You need to bring in an extra pair of hands, so you start building your team:

  • VA, accountant, first employee, associates, freelancers …
  • Sometimes you need to hire an office space;
  • Your one-off costs peak (new computers, office supplies);
  • Your marketing costs increase (because it is outsourced, or you simply try paid channels);
  • Your production costs go through the roof (if you are a product-based business).

So, what do you do? How do you make sure that you do not drain your cash reserves and find yourself in a “virtual bankruptcy” position?

In order to protect your cash flow, your objective is to bring the money in as soon as possible and delay payout for as long as possible.

  • Flip your mindset to “Cash > Profit”. During growth spurts or crisis, a big project with great revenue or profit might actually cause more damage, if the payment terms are not negotiated well. Therefore, make sure to prioritise cash.
  • Forecast your cash flow weekly! I admit, it is not the most fun task of the business, but it is the MOST CRUCIAL ONE. In normal business activity periods, monthly checks can be sufficient but in times of crisis or growth spurts, staying on top of your cash forecast is very important. If you don’t yet have one, download our free cashflow forecast template specifically designed for solopreneurs and micro-business owners.
  • Be conservative with your forecasting. This means, plot your worst-case scenarios on the cash flow forecast template – latest deadlines for the pay-outs and earliest deadlines for the pay-ins. This will ensure that you have “good news” instead of bad.
  • Have a healthy mix of clients: During Covid-19 lockdown in spring 2020, a lot of service-based freelancers and solopreneurs who had a few major clients struggled much more than those who had many different size clients. A healthy mix of clients (small – medium and big) will keep your business moving, even if you lose one or more at the same time. In essence, do not put all your eggs in one basket.
  • Upfront payments: If you are in a project-based service sector such as graphic design, illustration, architecture, event management, make sure that you don’t leave billing right until the end of the project, especially for medium-to-large size projects. Multiple payments depending on the stage of the project and upfront payments will help you have cash reserves in your account.
  • Negotiate payment terms: with your suppliers push them as far as you can and with your clients make sure to get paid as early as you can.
  • Know your numbers: What is your break-even figure? How much emergency cash do you need to have in your savings account? How much is your profit margin? Know these crucial numbers off the top of your head, so that you can analyse your cash situation or the value of a project quickly.

To finish, DO NOT PANIC. It is normal to go through difficult cash moments, and there are several different ways to inject cash in your business for a short period of time. As long as you are in control of your cash flow and you know your numbers, you will always find a way to grow stronger from this situation.

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