NEWS / INSIGHT
You need an early warning system for your cash flow
There's something you should know, by Sean Reel
There’s something you should know is our bite-sized business advice column. The amount of advice out there can be overwhelming, so we ask the professionals we meet along the way to tell us the one thing that they think every start-up needs to know.
Sean Reel is an active start up investor, venture fund advisor and media savvy entrepreneur. He runs everything from 100km races to multi-million pound finance restructures.
“Cash flow,” says Sean. “It’s the bit that will kill your business. But startups rarely put it at the centre – so it sneaks up on them when they least expect it.”
Sean recommends creating your own warning system and displaying it in pride of place in your office, so you’ll always know exactly when you’re going to run out of cash.
“On a white board, write two numbers – how many sales you’ve secured and the current rate of burn. That way you’ll know that if you’ve got £100,000 in the bank and you’re burning £10,000 a month (with no exceptional expenditure), you’ve got 10 months left.
“You can then decide, for example, that if you ever get to a point where you only have five months of money left, you’ll engage with your shareholders and let them know you’re going to need to raise more money. That way, you’ll have a long enough lead time to have a proper chat with them, or to find some other funding routes.”
Sean adds that while you’re adding up those sales, it’s important not to be distracted by large orders, particularly early on. “It’s exciting to see big orders arrive but as the business grows you need to be focused on where the profit is actually going to come from – because that’s what’s going to pay the bills and allow you to invest in the future.
“I’ve seen a lot of businesses that have grown their turnover rapidly but haven’t focused on the profit of those orders. But which would you rather be: a £10 million business with a £500,000 profit or a £5 million business with a £1 million profit?”
Well Sean, even we think we know the answer to that one!