Cash is king: Mastering cashflow when starting your business

Many new business owners assume profit should be the immediate goal, but cash is the real lifeblood of a business, and even profitable businesses can fail if they don’t pay close enough attention to their cashflow. Especially in the early stages of a business, carefully managing cashflow can be the difference between survival and insolvency.

Understanding where cash is coming from, where it is going, and what demands are coming around the corner is one of the most valuable disciplines an entrepreneur can develop. There are steps you can take from day one to ensure that you stay on top of your liquidity and avoid any nasty surprises.

One of the most common mistakes made by growing businesses is assuming that a healthy profit means the business is financially secure, but profit is not the same as cash.

In reality, there can be a significant gap between making a sale and receiving the cash.

For example:

• you invoice a customer for £20,000
• the customer has 60-day payment terms
• you need to pay staff, suppliers and overheads before the customer pays.

On paper, the business is profitable. In practice, the bank account may be running dangerously low.

Long-term investments, slow payers, delivery delays; there are many examples of business pressures that don’t affect profitability but can be seriously detrimental to your cashflow. Understanding the difference between profit and cash is one of the most important lessons entrepreneurs often learn the hard way, Successful business owners focus on both from day one.

If you’re flying blind as a business owner, by the time you identify a liquidity crisis it may be too late. Lack of visibility can make it daunting to invest if you’re running low on cash, or overconfident if you have a significant buffer sitting in the bank.

Forecasting can help eliminate that uncertainty. A good cashflow forecast will show future predictions of the following:

• Cash available at any given time – This can identify financing needs in advance, or good times to invest. Do you have a buffer in place for surprise bills?
• Customer receipts – Make sure your credit terms work for your business needs, and identify when you might need customer incentives to pay early.
• Seasonality – Not every business is consistent throughout the year. Make sure expected seasonality is factored into your forecasts.
• Planned expenditure – When will you pay suppliers and will you need to renegotiate supplier terms? When will you need to make large investments?
• Tax liabilities – Stay on top of your payment obligations. Multiple liabilities might need to be paid at certain pinch points throughout the year, so save for these in advance.
• Loan repayments – Will you have enough cash to meet requirements? Consider any banking covenants you need to comply with.
• Stress tests – Scrutinise your own assumptions - how much would it impact you if actual sales were, say, 20% below estimates? Plan for unexpected shocks.

A combination of the right accounting software, AI solutions and discussing your assumptions with your accountant can produce a forecast you can rely on, and it means you have one oven-ready if external lenders and investors ask for proof of future liquidity. It should be updated regularly to ensure you’re adapting to the performance in real time, and assumptions made should be realistic so that you can make sensible business decisions. Out-of-date or misleading forecasts can be just as dangerous as having none at all.

Finance is sometimes seen in a negative light by new business owners, but raising external finance is not always a sign of a struggling business. In contrast, it can accelerate growth and provide liquidity for the up-front investment often needed when setting up a new business operation.

There’s a whole range of financing options available to business owners, even at the early stages, such as:

• bank lending
• asset finance
• invoice finance
• director funding
• equity investment.

The right option will depend on the stage and nature of the business. Choosing the wrong kind of finance can often leave you paying more in fees and interest than needed. We work with businesses to identify the right type of finance for the specific needs of their business such as investment, credit control, growth or asset purchase.

Working capital is the cash tied up in the day-to-day operation of the business and is unique to every business. From the moment you accept an order to the moment cash has exchanged hands, there are key cogs in the machine that need to turn, and this process is known as the working capital cycle.

For example, you may have to buy raw materials in first, pay for the staff to carry out the work, convert those materials into a finished product, deliver that product to the customer and after all that, you need to ensure the customer pays! Cash might change hands at vastly different times at each step in this process, so understanding your own working capital cycle can help you forecast and negotiate the right credit terms with your suppliers and your customers.

Three key areas deserve particular attention:

1. Debtors

The faster customers pay, the stronger your cash position.

Consider:

• issuing invoices promptly
• using clear payment terms
• following up overdue balances consistently
• taking deposits where appropriate
• Many businesses spend excessive time winning work but insufficient time collecting payment.

2. Creditors

Managing supplier payments effectively can improve cash flow without damaging relationships.

This means:

• understanding payment terms
• avoiding unnecessary early payments
• planning larger purchases carefully.
• The objective is not to delay payment unfairly, but to manage cash sensibly.

3. Stock

For product-based businesses, excess stock can absorb large amounts of cash.

Ask yourself:

• How much stock is genuinely required?
• What’s your stock turnaround time?
• Are slow-moving items tying up cash?
• Can ordering processes be improved?

Every pound sitting on a shelf is a pound unavailable elsewhere.

In the early stages of a business, cash is often the difference between growth and stagnation, or even survival and failure. While sales, profits and growth are important indicators of success, maintaining control of cash flow provides the foundation that allows everything else to happen.

Businesses that regularly forecast, collect cash promptly, manage working capital carefully and plan ahead for tax obligations put themselves in the strongest position to navigate the inevitable challenges of growth.

At Crowe UK, we work closely with entrepreneurs and growing businesses to help them understand their financial position, improve cashflow visibility and build robust foundations for sustainable growth. Please get in touch with your usual Crowe UK contact if you’d like to discuss more.