Managing Your Cash Flow
Cash flow – not profit – should be your top focus
5 min read
01 February 2015
When asked, most new entrepreneurs tell me that the most important item on their agenda is making a profit, but are they right?
Certainly making a profit is essential if a business is to prosper long term, but I would argue that cash flow is the single most important thing to worry about in the initial stages of creating a new enterprise. Unless you watch your cash flow, your new business may not be around long enough to show a profit! Cash as they say is king, but in this context, cashflow is certainly queen.
Managing cash coming in and out of your business (or household come to that) is critical so how do you actually do that?
Well, it’s firstly important to understand that without sales you do not have a business. That’s an indisputable fact. Sales produce the income you require, but it’s the cost of obtaining those sales, whether a product or a service, which will ultimately decide whether your new venture is still around in 20 years time. Remember that overhead is not only the cost of obtaining sales but of running your whole operation including office costs, cars, vans, staff etc.
I always suggest setting up a ledger for income and outgoings right from the start and to check it every day, especially in the early stages. What have you spent that day and what have you received? Do it daily regardless of how busy you are. It’s vital you know what’s going on. Create a three lined column in the middle section and write “available resources” in it, by this I mean either cash on hand or available loans/overdrafts. I.e. cash you can get your hands on.
Focus not only on selling as much as possible but on making sure you have a sufficient inbuilt margin to cover your costs of operation, including marketing and tax.
Once you have made a sale, focus all your energy on getting paid. Don’t be scared to ask for payment. Honest people intend to pay so will not mind being asked. You do not want customers who avoid paying anyway so weed them out early. Don’t be fobbed off and most importantly don’t let them run up debts that will never be paid.
Pay your own bills on time but try to negotiate as long a period as you can as this preserves your cash and improves its outflow. Managing this aspect is as important as getting your own money in, but be honourable; if you say your cheque is in the post, make sure that it is.
Read more about managing your cash flow:
- Cash flow management: Organise money like a night out
- Top tips to boost your cash flow
- 10 tips for getting paid on time
As I said at the beginning, in my opinion cash flow is more important that profit in the early stages and you should focus a lot of your administration time on managing it well.
Sales are another area you need to approach with laser like focus because new business is the lifeblood of any enterprise. Learn all you can about low cost marketing. Big advertising and marketing budgets don’t always guarantee big sales volumes.
Approach marketing more like a sniper would approach a target. Make sure your aim is true and your marketing is effective. Stay away from generic marketing. In the early stages of business you are trying to survive, brand building can come later and hopefully will happen by osmosis.
I often use a football analogy when describing how business works. You don’t need to understand football to realise that no team can be effective without a goalkeeper. In business that person is your accountant so choose him or her well. The cheapest may not be the best and a mistake in this area could cost you a lot of money as your business moves forward. Take your time and choose well. Ask for recommendations.
Entrepreneurs are an important part of our economy, and without a strong economy we wouldn’t have the money for all those essential services we love so much. Things like an effective education service, fire brigade, police force, and of course our beloved NHS.
Let’s face it: the money has to come from somewhere and that place is new and established businesses thriving across the country.
Dr Stephen Fear is a serial entrepreneur and the British Library’s Entrepreneur in Residence.