The Importance of good cash flow for Start-ups

Business man squeezing one British Pound out of a money pipeline. Vector illustration of faucet and cartoon character. Concept of reduction, saving, tighten one's belt.
Alan Clerkin

Alan Clerkin

Share on facebook
Facebook
Share on whatsapp
WhatsApp
Share on linkedin
LinkedIn

Business man squeezing one British Pound out of a money pipeline. Vector illustration of faucet and cartoon character. Concept of reduction, saving, tighten one's belt.

Poor cash flow is one of the main reasons of small businesses fail in Ireland.   With over 10 years’ experience in business and having met hundreds of small business owners at our offices, one of the topics of conversations that comes up a lot between business owners is cash flow or the lack of it.

Cash flow is the most important factor to look after as a business owner.  It is the balance of money coming in to your business from sales and out of your business due to wages, rent, expenses etc.

I’ve met some business owners who don’t actually invoice every week or even every month.  They could let invoicing build up and only invoice 3 or 4 months after they completed work.  This is a fatal and incompetent way of running a business.

Invoicing and prompt invoicing is a vital part of good cash flow management.   As a business owner, you must be sending invoices immediately, on a daily basis, depending on the nature of your work.  If you are providing a service, consider seeking a deposit upfront, or payment part way through the work.   The sooner you invoice your customers, the sooner you will be paid.

Invoicing must be carried out immediately and in an efficient way for both the business owner and customer.  For example, when Dublin Mail Drop first set up in 2008, we offered monthly payment options on our services, however we discovered that a percentage of customers monthly direct debits were bouncing, so we decided to stop monthly payment options and offered our customers annual payment options, with a reduced price in comparison to monthly invoicing.

Apart from payment up front for the year, the conversion from monthly to annual invoicing meant we had one invoice per client per year, in stead of twelve.

A negative cash flow can do huge damage to any business especially when it comes to the payment of staff wages and suppliers.  If you cannot pay your suppliers on a timely basis, you cannot function as a business without their products or services.

Last year, according to a survey by the Global Business Monitor, Ireland’s small businesses are waiting an average of 38 days for payment from customers, longer than any other country surveyed.  39% of Irish SME’s said cash flow was an issue and 41% suffered bad debts in the last 12 months, with the average debt of €23,000 been written off.  This is a shocking figure for any small business to be written off.

The following are ways to improve cash flow and avoid bad debts:

  • Prompt invoicing.
  • Seeking upfront deposit or payment part way through work, depending on your business.
  • Collecting outstanding debt (getting tough on clients not paying promptly).
  • Improving payment options for customers i.e. have various options set up, especially card payments, bank transfers, Paypal and other forms of electronic payments.
  • Setting up a line of credit with your bank, the most common of which is an overdraft.
  • Increase pricing.

Allied Irish Bank have outlined a very useful cashflow planner for small business.   It lists all possible receipts less expenditure and will quickly show your businesses standing in relation to cash flow.

Remember, this is your business, that you have worked hard to build up, so don’t be careless when it comes to managing your cash flow.