Bizstartup.ie - NewsFocus on cash flow

“People too often look at an order book, which can be full, or look at the profit margin, which can be healthy, but they don’t make adequate provision on paper for the vagaries of business that lead to cash-flow crises,” he points out.

In his opinion, eight out of 10 of start-up business failures emanate from an acute cash-flow crisis rather than lack of sales or margin.

“I think anyone in a start-up business situation should ensure that in the provision of their overdraft, in the provision of getting paid by customers or in turn having to pay others, that the key thing they focus on is having an adequate supply of cash to get through the next six days, the next six weeks and the next six months in all conceivable circumstances.”

Overdraft advice

When seeking overdraft facilities from the bank, he advises ensuring that your approval level is beyond your wildest expectations of what you’ll actually draw down. “Never let your drawdown equal your approval figure because you can always point to the fact that you’re within the ceiling of financial approval,” he says.  

Early warning systems

It’s vital that businesses put early warning systems in place in relation to their bank balance and cash-flow projections, he says. “Often assumptions that are too tight on cash flow are just not negotiable – if you go back to your bank and say you underestimated your cash-flow needs, it fundamentally undermines your credibility in the eyes of the bank manager.

“I think you should leave plenty of elasticity in your business plan for the fact that a debtor that was going to pay you in 30 days might slip out to 90 days. The domino effect of a bad debt has to be factored into every business plan. You’re so eager to obtain sales you are often cutting corners in terms of the liquidity of the deal that you’re doing and leaving yourself very vulnerable.”