Fail to prepare to manage your business finances and prepare to fail
From the moment of company formation the financial reality of running your company will quickly hit home. Ignore the financials and the likely sad reality is that you will go out of business no matter how good your idea.
It's therefore clear that you should prepare to manage your business' finances as early, and in as much detail as possible, to give your company the best possible chance of success.
Managing your business finances
As with most tasks in business, there is almost always an option for delegating or outsourcing, and finance is no different. Accountants are there to help you along the way, particularly with the more difficult financial tasks, and can make a key difference in the early stages of running a company.
Budgets however are typically constrained in a start up business and the luxury of having either an in-house finance expert or expert accountant on hand is one most can’t afford. In such instances you will simply need to roll your sleeves up and get stuck into the numbers yourself.
This is likely to be no bad thing though. As one of the owners or founder members of a company, knowing how much revenue every component of the business generates, and more importantly knowing how much each one costs, is never a bad thing. Such knowledge will be crucial when both day-to-day and critical decisions have to be made.
And of course technology is getting better all the time and helping to make it ever easier to keep on top of the finances.
Plan and forecast those early stages
Exact statistics vary but the numbers of new businesses that fail in their early stages is high. Around 20% will typically fail within the first year and over 50% are predicted to go under within the first three years of existence.
To put that in numbers if we assume an average of 400,000 company formations in the UK every year, that means 80,000 businesses will fail by this time next year and more than 200,000 will go out of business in 3 years’ time.
We all of course think and hope that this won’t happen to our company, and to try and make sure of this there are some key financial tasks which you can carry out early – calculating start up business costs and forecasting.
Knowing how much it will cost you to stay in business in those first 12 months will help you make it through them and likely establish good cost saving habits which will continue to sustain the business throughout those inevitably challenging early years.
You’ll also need to get into the habit of predicting sales revenue or forecasting. As with all future planning this will necessitate you to make some assumptions based on your market knowledge and in the context of how the economy is likely to be in the relevant period you are predicting sales over.
To predict sales revenue, you’ll also have to make a decision on how you’re going to set prices. Will you simply aim to add a margin to the costs of producing your product or service, or will you base your price on what you perceive customers are willing to pay?
Crucially, working out both your start up costs and forecasting sales revenue will let you decide whether you will need some financial help in those early stages or can fund the company yourself. Many people prefer it if they can to keep all the equity they can through self-financing but if that’s not an option for you, or indeed you are looking for some support from an outside investor, there are various sources of start-up finance to consider.
To find out what these are have a look at our article on ‘Raising finance for a business’.
Cash is reality!
"Turnover is vanity, profit is sanity but cash is reality". This well-known mantra neatly sums up what matters financially in business but what does it mean exactly?
In short it means that sales revenue, turnover, income, the top line – whatever you want to call it – doesn’t really matter when determining a company’s financial health. What's most important is the amount of money you’ve got in the bank when you’re asked to pay those you owe money to. If you don’t have enough money in the bank when you’re creditors come calling it’s unlikely you’ll succeed even if it appears from the spreadsheets that your business is profitable.
Making sure your cash flow is in good shape is vitally important and that just doesn’t mean you are spending less than you are getting in. You need to ensure everyone who buys what you’re selling pays on time or at the very least don’t take too long to do so. Credit control is critical, and while some customers may be great at paying on time it’s likely, since they will be trying to maintain their own healthy cashflow, that you will need to remind, and keep on top of some, to make sure that they pay up.
Focus relentlessly on your cashflow therefore and you’ll have a fighting chance of not being one of those statistics about companies which fail within 3 years.
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