Have you ever tried to drive your car blindly through the middle of a forest in the dark with no headlights to help guide you? Probably not, because you’d definitely hit a few trees along the way, you might even end up stranded in a river or crash head first into a ravine. But you may find you are doing just that if you don’t forecast your numbers at the outset of launching your business.
New businesses often struggle to manage cash flow at the outset, especially if the business is moving quickly, but if the cash dries up, the business fails. What steps can you put in place to manage the risk and how should one manage cash at a start-up?
Numbers talk and you have to know your profit and loss information inside out if your business is to succeed. People often refer to growth and ‘margin’, which is the gross profit. The problem is, too many people think they have a margin of 75% for example, but they don’t look at what makes that margin up.
Instead people tend to look at sales increases, but the problem is, if your cost of sales is wrong, things could take a turn for the worse unless you have a magic pot of money to get you out of a dire situation.
If you are anything like me, the idea of looking at complex spreadsheets and numbers, although important, is both scary and pretty boring. We all like to see the growth, the creativity and the graft that is being put into our business. However, those spreadsheets tend to come into existence after the event or period end, which makes them ‘historical documents’, and in a fast moving environment they become just that - history.
The reality is, these numbers are safeguarding your future. The financial planning we speak about as start-ups, before we start trading, is effectively the business model and forecast; both of which are vital to maintain as you develop your business.
Many people make mistakes with their numbers in the beginning, me included. I have always surrounded myself with good financial people because I am accounts averse, but the only problem I ever faced was depreciation some years ago when I had appointed a young financial director who didn’t advise me properly and didn’t do the numbers. That slowly crippled the business, but we fought hard to keep our heads above the water with the help of our bankers, and we ended up selling it on. Lesson learned; move on.
Profit and loss sheets themselves are of course only effective if they can report on what has happened in the business, but they also need to show you the risks that you could potentially have with your cash flow. This usually comes from the challenges you may be having with both generating income and controlling your fixed and variable costs.
Ensure that your numbers show your team where your margin/cost of sales targets, overhead costs and budgets are for the next three months, and then talk about how you can achieve it.
It’s a useful exercise to play out any ‘what if?’ scenarios across your business; think about the very worst case and plan for it before going live. An effective scenario should be created around what the business owner believes could happen to allow for the adjustment of any part of the numbers to make them work, whether that is, trading, income/margin, overheads, fixed and variable costs, interest or depreciation. Start-ups will also need to consider their funding needs, to ensure the right amount of cash is available at all times.
Late payments can also be a big problem for start-ups. What is your contingency plan if your payments are late, reduced or worse still, don’t arrive? When you can change all of these parameters and get an immediate review of your business model and forecast, then you have a really good chance of assessing all of the risks associated with your new business idea in a transparent, logical way. From there, you have your targets planned just in case that scenario presents itself.
As an entrepreneur, you will probably know your margin percentage if you have previous market experience of those sectors, before you even start your own business. But hopefully now, you will be forensically checking the forecast first to see if that can be achieved and then going back to the historical data to see if you have ever actually achieved it.
Jerry Brand has an MBA from Surrey University and is the Founder of entrepreneur’s charity, The Brand Foundation.
The Brand Foundation is a registered charity (no. 1165700) that is providing a free to use, secure online app, to give all budding entrepreneurs with a great business idea, the chance to succeed; regardless of personal circumstances. Members can register online and model their business idea/s for free using BizKit, a specialist tool that will allow them to forecast their first three years’ trading figures with no future commitment. The Foundation aims to help individuals avoid the common mistakes that so often lead to start-up failure.
The Brand Foundation is a not for profit organisation funded through sponsorship and upgrade fees to BizTik (an advanced application that provides full funding analytics and offers access to potential funders).
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