The number 1 reason most start-ups fail – and how to avoid it

24 Jun, 2022 - 00:06 0 Views
The number 1 reason most start-ups fail – and how to avoid it

eBusiness Weekly

According to the University of the Western Cape, South Africa has a higher start-up failure rate – 70-80 pc of small businesses fail in the first five years – than elsewhere in the world. Cash flow is key to keeping businesses afloat – here’s how to ensure that your business does not run out of money.

In 2021, the top reason that start-ups failed was because they ran out of cash. Managing your cash flow correctly could help you grow your business, while failing to do so could end your entrepreneurship journey rather abruptly.

Cash flow is how much money you have flowing into your business, and how much money you have flowing out. The concept may be simple, but the reality is that maintaining a healthy cash flow is one of the hardest challenges you’ll face as an entrepreneur.

Keep in mind, your cash flow and profit are not the same. In fact, your business could be profitable on paper, but you could be facing a negative cash flow. Here are some factors influencing your cash flow.

Buying stock

You need stock to be able to sell to your customers, but you need money to be able to buy more stock and keep your business running. If you overspend on stock, or experience a slump in sales, you might find yourself with little to no cash left to cover expenses such as salaries, rent or supplier invoices.

Late payments

Consider the payment terms you agree to with your customers and think about what you can do to avoid slow payment from them. Be sure to make the terms of payment clear upfront when on-boarding a new client and don’t be afraid to cut ties with bad payers.

High upfront costs

It’s not unusual to request a deposit for projects that incur big expenses from the start. A deposit covers these while the remainder of the cost can be paid at key milestones during the project or on completion.

Huge expenses
Do you really need full-time employees? Could you save on salaries with a freelancer or part-time team? Are you paying too much for office space? Have you splashed out on fancy equipment, logos and business travel? Cut down on unnecessary expenses to free up some cash.

Five tips to manage your cash flow
1. Prepare a cash flow statement
A cash flow statement helps you get a clear picture of your company’s value and guides the decisions you’ll make around your finances. It details how cash entered your business and how it was spent during a specific reporting period, usually quarterly.

Cash flow statements usually include cash from operating, investing and financing activities (and this includes money used or disbursed in these three areas).

2. Send out invoices quickly

The sooner you invoice your customers or clients the sooner they can pay you. You can also consider ways to incentivise your clients to settle their invoices early, through discounts or value-adds for future purchases.

3. Keep a close eye on cash flow

Update your financials regularly (or have your accountant do it, if you have one) so that you have an accurate idea of the health of your business. You could also invest in accounting software to help you stay on track – most have a dashboard that gives you real-time cash flow figures.

4. Finance big buys

If you’re in a fortunate position of being cash flush, you might be considering buying bigger items (e.g. a new premises, vehicles or equipment) cash. But while too much debt is never a good thing, exhausting your cash reserves for assets could harm your business in future if you can’t access cash to settle your expenses. Consider financing options that you can pay off in smaller instalments over time.

5. Look into your cash flow “crystal ball”
Managing cash flow is not just about how much money you currently have coming into and leaving your business. Preparing six-month (or even a year’s) projections will help you make sound decisions to keep your business in the black. Think of projections as your warning system for slow periods or other financial hiccups. Here’s how to do it: –

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