How do you get a small business owner to squirm? Ask them how their cash flow is going. The response will be like seeing someone leave the dentist after three fillings! Their mouth feels like there are three golf balls in it and it is simply pain, pain and more pain. For small business owners or start-ups in particular, it is tough.
For example, imagine you are at any bank in Australia and you say, “Hi, I’m starting a small business.”
Bank officer: Do you have any equity in your home? Have you run any successful small business before? Do you have a 2-year track record backed up with financials, profit & loss statements and notice of assessments?
You: Look, I have worked in the corporate world, and I have had enough. I have some ideas — a way to make some money — so what I am asking for is some unsecured funding.
Bank officer: Oh, I am sorry. We need two years’ worth of cash flow positive financials, and then we will average the numbers out. Then it goes to the business banking division, and their criteria are very different to residential lending!
So what do you need to know as a small business owner looking for cash? Without equity in your home, you are already climbing a mountain, but the big issue is that banks in Australia, or banks in general, will not recognise those who have failed. Ever heard this? “You want some money for your fabric business, but when you did it three years ago you did not make any money — sorry.”
Taking a leaf from Silicon Valley
The attitude in among venture capitalists in Silicon Valley is generally more positive on failures. They accept that it is part of the journey towards success. It is amazing how different and how conservative our banking system is, which means we need to look at other options to get a business off the ground (and not just off the ground, but off the ground and up and running).
However, when it comes to it, we live in Australia, and we play footy on the field where the ball lies. On top of that, we were heavily cushioned by not having our banks fail during the last global financial crisis, so I am not complaining. I am just saying that if small business in Australia represents 25% of the employees in Australia, we need some things to change to get funding.
You have probably heard this statistic for Australian businesses: In their first 3 years, 70% of businesses that go bust are still profitable, but just ran out of cash. From a cash point of view, business owners get to a point where cash becomes like a pimple you can’t squeeze — if you do, there is nothing left! Sorry if you’re having lunch, but you know what I mean. You have to be disciplined with cash. Here are a few tips for managing cash flow:
1. Invoice as soon as the work done, and make the follow up phone call at 14 days. Depending on your client, you could push it out to 180 days or more. In manufacturing, however, get a deposit and see if you can get a fixed amount paid monthly.
2. Make it tap and go. In other words, make it as easy as possible for your customers to pay you. Always quote your bank account number on your invoices, ask for direct credits or automated payments or get a mobile payment solution.
3. Cash management is all about managing your cash flow by understanding how a business works (in particular your suppliers). As you are starting out, consider that your new clients could be also be startups or not used to payment deadlines.
Be conservative with your cash to get you through the tough times. It really is king when it comes to both obtaining funding and surviving the day-to-day.