2019 was a record year for startups, with almost 700,000 new businesses launched in the UK. This stat was up 2.8% from the year before, and a similar growth trajectory was expected for 2020, though of course we now have the coronavirus curveball that has left the business world in a spin, making it difficult to predict where we would have been, or, where we will be.

Unprecedented problems, familiar financial solutions

The current climate is very different from the 2008 recession, there are many funders willing and able to lend, less reliance on Banks, greater access to technology and new markets and not all businesses are suffering. Parts of the stock market are reflecting the shift in consumer spending with huge increases for Netflix, Amazon and the supermarkets. Someone will always profit from others adversity.

The overall ongoing impact on new business births remains to be seen, after all it’s not like the 2019 stats come on the back of an economic boom and certainty around the future – Our definition of “uncertainty” though might be a little different in a post-pandemic world.

Entrepreneurial spirit will always prevail

Many might consider the 2019 stats surprising, but the Centre for Entrepreneurs’ director of policy and research, Matt Smith, said “It is encouraging that despite a politically turbulent year in which business confidence hit new lows, business formations continued to set records. It suggests that entrepreneurial spirit is well and truly embedded across the UK, with entrepreneurs continuing to turn their ideas into action.”

At Partnership Invoice Finance we have always been champions of the UK entrepreneur, we fully agree with the Centre of Entrepreneurs and expect this spirit to prevail throughout the pandemic, the economic downturn and what we believe will be a strong (though perhaps long) bounce to recovery.

The key, of course, for these budding businesses will be avoiding becoming a negative statistic and rather growing their business from strength to strength. We all know that the fundamental requirements of launching a successful startup are complex, but in the early days success, once you have made that sale, crucially rests on basically one thing – cash flow.

90% of startups fail because they run out of cash. So how can you prevent poor cash flow at a time of such uncertainty? We will talk you through avoiding some common cash flow pitfalls, and how to take every opportunity to maximise working capital.

1.  Be cash smart

Good cash flow management, in simple terms, is understanding every inflow and outflow of cash in your business. Being in control means even if you delegate the nuts and bolts of this, that you always know your cash position and can make decisions based on this data; from changing slow moving stock/service lines (or understanding the impact of holding these), knowing when and where it is right to reduce or increases prices through to making payments when necessary and simultaneously encouraging everyone who owes you money to pay as soon as payment is due. By doing this you maximise your working capital at all times.

Great cash flow management involves being vigilant about risk management and limiting any nasty surprises, such as unanticipated payment lags and unplanned cash outlays. The current circumstances are an extreme example of how the business landscape can change overnight – always be prepared for uncertainty.

2.  Document your cash flow management

This means you must understand that even though you might come in on budget, that doesn’t mean your cash flow is as expected. If clients are late to pay, but you’ve already had to fork out for overheads then that equals a cash flow shortage despite making a profit. The Profit & Loss statement for the business is only part of the picture and one most business owners focus on, but it can and does tie into your cashflow – a loss can come from missing out on the potential profit that higher sales could bring (due to no access to cash) as much as from low margins or high overheads. This kind of insight takes data, and it’s your job to record that data in a meaningful, measurable way.

3.  Anticipate seasonable fluctuations

Even if your business isn’t entirely seasonal, there are often seasonal fluctuations that can impact anyone. Without multiple years of trading history to analyse it can be trickier to gain useful insights into seasonal variables and when to expect increased costs or declines in trade. Think strategically about overheads and how you can mitigate seasonal fluctuations (even large scale sporting events can impact on sales). Make hay while the sun shines and put money aside during your “up” months. Can you negotiate longer payment terms with good suppliers during your down months off the back of good payment relationships and open, honest communication? Are you optimising your stock control and inventory management to reflect business demand?

4.  Save for a rainy day

Every business needs a rainy day fund. The current crisis will have been a great example of how uncertainty can plague every business no matter how apparently safe or in-demand their product or service, and the government support that has been given over recent months must be considered and exception and we feel is unlikely to be repeated at such levels.

The difference between a business that has enough set aside to make it through turbulent times, or not, can of course be the difference behind success or failure, but it’s a delicate balancing act. Stockpiling too much cash can result in missed opportunities or sluggish growth. As long as a business has enough to keep people paid and cover critical overheads, survival is possible. Remember that in a downturn or during a period of reduced demand, costs and deductions will also decrease, so things may not be as bad as you might expect.

5.  Understand that even good customers can sometimes be late to pay

Using current circumstances as another example of how even successful, buoyant businesses can find themselves facing difficulties, you may find even your best payers are a little tardy from time to time. The key to fruitful business relationships is communication and transparency. Just because a client is late to pay does not mean they are unreliable – how this predicament is dealt with says more about your client than their payment history. Through our experience as credit control experts, we have learned that burning bridges never pays dividends. We do not advocate continuing to extend credit terms to poor paying customers long term, but keeping lines of communication amicable and approaching late payment situations with empathy and understanding will keep your clients on-side and your bank balance satisfied.

6.  Be prepared for how growth affects your cash flow

Just as we used the global pandemic as an example of budgeting for business interruption, during these unsettling times many businesses have experienced a huge surge in demand that they were not prepared for. Both circumstances require careful management, and both require the same remedy – access to cash! Rapid growth can paralyse a new company with limited cash flow at precisely the moment it needs to be agile and respond to increase demand in order to bloom. No business has limitless scalability, but positive cash flow can decrease with growth as your costs increase in advance of seeing that commensurate increase in revenue coming into the Bank account. Invoice finance can be the perfect solution for the “enviable” problem of sales growth because it can instantly unlock capital tied up in those new invoices, effectively hitting the fast-forward button on your income to match the speed of your growth trajectory and rising costs.

Invoice finance is a powerful tool that all new businesses should be considering to maximise their agility and growth potential during uncertain times, and while good cash flow management is not a panacea to all of the challenges businesses face, access to cash is certainly the step that will give your business the best chance of profitability and prosperity even in the face of global economic challenges.

For more insights into managing your cash flow and the importance of access to funding in business survival and growth, take a look at our blog archive.