The main reason why businesses fail – and how to avoid it
Your idea is brilliant, your business model is revolutionary, your profitability is exceptional and investors are backing you: will you be the next start-up success story? Well, not if you make this all too frequent mistake of neglecting your cashflow! It’s estimated that 4 out of 5 businesses fail because of a want of short-term liquid assets.
Onirade offers you 6 tips to avoid the pitfall of an insufficient treasury:
1. Spend wisely at the beginning
Obviously, launching a start-up requires investments that can be substantial, but it is primordial to retain your critical sense for each expense. This even more important during the first few months of existence of your business, when everything is still to do and it is difficult to distinguish the truly urgent and necessary expenses from those that can wait or could even be done without entirely. For sure, being driven and cultivating a “think big” mentality are important, but you should be weary of letting this ambition mutate into a delusion of grandeur. Your office does not need these ergonomic armchairs or this trendy coffee machine. Actually, you start-up might not even need and office at all!
What’s most important is to remain rational and to think each purchase in terms of cost and benefits. Keeping a rigorous budget updated will help you with that: knowing when you plan to break-even, you can better evaluate the impact of each expense and stay clear from extravagances and impulsive purchases.
2. Be realistic about your future sales volumes
Entrepreneurs are usually big optimists; and essential quality to carry on with their crazy projects despite the obstacles on their way. However, you should be careful not to let this optimism impact how realistic your sales projections are. If you are convinced by your excessive confidence that your sales will double in the next six months, or that you will be able to capture 20% of the market in the next two years, you will be tempted to over-spend. And when your predictions do not come true, you’ll be in for a rude awakening.
It’s better to be cautious and conservative in your predictions. Refer to past years sales (your own or your competitors’) to make objective predictions. And if you lack the experience or intuition, don’t hesitate to ask a mentor for help!
3. Budget your cashflow
Make a cashflow statement, and you’ll be better equipped to anticipate your revenues and expenses for a specific period of time. This way, you will know when the cash is coming in and when it is going out, and so you can prepare yourself for those moments when you are short on cash.
For instance, the Holidays is often a period when your sales will increase, but this means that you have to get ready for this by growing your inventory many weeks in advance. This is a big seasonal expense which can be profitable, but if you must pay your suppliers before you get paid by your clients, you’ll find yourself in a serious predicament!
Without a cashflow statement, you are only guessing at your future needs, and you risk to incur late-payment penalties, to damage your reputation in the eyes of your clients, or even to go bankrupt!
4. Be proactive in your debt collection
Your clients are just as vulnerable as you are to cashflow issues! If you stay passive when account-receivables are not paid to you on time, your own cashflow will quickly become unbalance!
Even if your clients are much larger businesses than yours, do not be intimidated, otherwise you will be taken advantage of! If you are not insistent enough when the time comes to be paid, you will be paid last, or not at all. Do not be afraid to set up late-payment penalty policies, and be sure that they are an integral part of your contracts.
Internally, give yourself a collection policy, which will set in advance the steps to take in case of late payment: when to send your invoice, when to send your client a written reminder or make a phone call, etc.
5. Keep cash on hands
Even if you follow all of our tips, you will still have to face mishaps: that’s part of the start-up adventure. Without an adequate financial cushion, any sales slowdown could lead to a catastrophe.
In general, it is recommended to plan a cash reserve corresponding to about two months of operation. This is often easier said than done when you are only just starting out in business and have plenty of expenses, but without enough liquid assets, you are facing a very real risk of insolvency!
6. Be sure to have access to additional funding
Cashflow problems are often a symptom, at the core of things, of a very common mistake for many start‑ups: insufficient capitalisation. Before you start a business, be sure that you have enough capital. Along the way, it’s always possible to solicit investors, yet your success is all but guaranteed, and you will have to give away an often big chunk your business, not to mention that the governance of your business could be disrupted by the arrival of one or more new shareholders.
Many business will try to take out a loan or open a credit margin in a banking institution. But what can you do if the bank refuses to finance your project, or if you need even more cash?
An increasingly popular solution in Quebec is factoring. This is a financing method by which you sell your account-receivables to a specialised company, in order to get immediate access to the cash generated by your sales. This creative financing technique has undeniable advantages: admissibility is based on the solvency of your clients rather than your own, you outsource the hassle of debt collection, and you enjoy more flexibility.
Onirade allows you to make a quick and easy factoring application online!