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Day 14. Planning your cashflow.

We’ve worked out our budgets and considered where the start up money will come from so now we just need to make sure we have cash available when we need it. More businesses fail because they run out of cash than fail because they are unprofitable. Profits are important but you need cash to keep your money making venture afloat.

Completing your cashflow forecast

Download your cashflow template and get planning.

Download your cashflow template and get planning.

Predicting your cashflow is not an exact science, whilst there are some entirely predictable incomings and outgoings others are less easy to forecast. One of the things that I’ve found in 21 years in business is that money goes out sooner than we would like and comes in later than we wanted. The challenge is managing the bit in the middle! Today I want you to have your best shot at predicting what your cashflow will be for your money making venture. Click here to download a template to help.

Completing your forecast:

  • start by changing the dates to reflect the period you are covering including the months at the top of each column
  • next fill in your known, fixed expenditure e.g. if you pay a fixed amount for electricity each month put that amount in to the relevant boxes
  • now take a look at your project plan and your budget and enter your budgeted figures for marketing etc. in the months you expect to spend the money
  • if you need to buy raw materials, how much will you need to buy and when? Remember this expense may be spread over several months as and when you need more supplies
  • now calculate when you can expect to receive the income from sales and in what amounts. How long is the gap from buying raw materials to receiving payment for finished goods? Be realistic. If you buy your raw materials in month 1, make them into product in month 2, even if you sell direct you may not receive payment until month 3 and then you probably won’t sell all that you have produced in the first month. It may therefore take you four to six months to cover your investment in raw materials. This can be even longer if you are selling via a third party, especially large companies who are notorious for having 60 or even 90 day terms to payment of invoices.
  • check that you have forecast your income and expenditure in all areas

If you are using the template without adding any rows or columns your totals should calculate automatically, are there any minus figures? These are the months when you run out of cash.

Dealing with a cash shortfall

If you are going to run out of cash there are a number of options for you to consider:

  • be less ambitious with your sales targets in the early stages so you can reduce your raw materials costs and, possibly, your labour costs
  • go for slower growth
  • increase your prices
  • offer customers an early payment discount
  • take a bigger deposit
  • invest more money in the beginning
  • ask your bank for an overdraft
  • review other expenses and either cut them down or delay them until you have the money
  • negotiate a trade account with your suppliers to give you longer to pay for your raw materials
  • if you are selling to large companies who are slow paying you could consider factoring where you sell the invoice to a factor company. Typically you will receive payment for around 80% of the invoice amount with the factoring company retaining the other 20% when your customer eventually pays the bill.

The one thing you must not do is bury your head in the sand! If you run out of money you may be trading illegally and you will certainly spend your time fending off creditors. Your bank is less likely to help you if they think you are not on top of your finances but they may well be helpful if you go to them with a well organised cashflow forecast when you ask for an overdraft or loan.

ACTION: Complete your cashflow forecast and amend your plans if you have a problem with a lack of cash.

RECOMMENDATION: The Training Pack uses to manage it’s finances. This is a user friendly book keeping and accounting package designed for use by the small business owner with no accountancy training but also accountant friendly. It is a cloud based package so accessible any time any where. If you would like to try it you can sign up here. You will save £1 per month and I will make a little bit of money too! I am not an affiliate for many products but this is one I am very happy to recommend, it makes managing my numbers so easy.

Next steps, should you choose to take them…

  1. Share any insights or recommendations in the comments section here.
  2. Join the conversation on Facebook to gain support from the 21 Day Challenge community (we’ll be looking at some of the benefits of social media later in the challenge but for now being active on this page and on Facebook can help boost the way people can find you on the Internet.)
  3. Tweet this ‘I’m working on my cashflow forecast as part of @Glenda_S’s money making challenge. #21DMMC
  4. Join us tomorrow to when we’ll be starting work on our marketing plan.

Day 13. Financing your plan.

How did you get on setting your budget yesterday? Did it show you what level of investment will be needed to get your idea off the ground? For example are you going to have to invest in raw materials or marketing before you sell anything? Are you able to finance that amount yourself preferably without getting in to interest payments on your credit card? If not then today’s challenge is designed to get you thinking of different ways in which you could raise the investment needed?

Sadly money doesn't grow on trees so you may need to read this page to find other options!

Sadly money doesn’t grow on trees so you may need to read this page to find other options!

Financing equipment

I’m starting with equipment because it is a capital expense and, as such, tends to be viewed differently by lenders and the tax authorities. By now you should know what equipment you need and how much it will cost but do you need to buy it? Have you checked out recycling sites for example or there are probably similar sites in your locality? How about posting what you are looking for on Twitter, Facebook or Gumtree? You may not be lucky but if someone is wanting to get rid of what you want it would be a win-win. Look out for charities in your area that take other people’s cast offs, restore them and sell them to others who need them and in doing so provide employment opportunities for those in need.

Do you need to buy the equipment or could you lease it? Would leasing save you money? The sums may well depend upon how long you need the equipment for and what length of agreement you can negotiate but it is worth exploring.

If you do decide you have to buy do you really need new? It’s often possible to make considerable savings on items which have hardly been used. Ebay would be a good place to start looking.

If you are buying it can be worth talking to your bank to see if you can arrange a loan. A loan is usually a lot cheaper than an overdraft. However if you are buying for a business you may need to produce a business plan before the bank will consider you. Lenders are often more comfortable lending to finance equipment purchases because there is something to secure a loan against. For more ideas see the section on ‘Raising Finance’.

Using other people’s money

This is not as underhand as it sounds! Could you set up an account with your supplier which would enable you to pay in 30 days or more? This would allow you to convert your raw materials into product which you could hopefully sell before you have to pay the invoice. If you can settle the account with a credit card you may get up to 30 more days before you have to start paying interest on the money. Just make sure that you remember that this bill will need paying before you spend the money on other things and be aware that a supplier is unlikely to deliver further items if you haven’t settled their last bill.

Should you be taking payments, or at least deposits, from your customers before you buy in raw materials? If you are providing a bespoke service then this is almost certainly the case. Make sure that you have a clear contract or terms of business to protect both you and your customer.

Could sponsorship be an option? Your sponsor will probably want to know that what you are doing is consistent with their values and typically that it will reach their target audience. They should want to use their sponsorship to generate positive PR, such as media coverage, for their organisation and will probably want their name and logo to be highly visible in whatever you do. Typically sponsorship is an option for charities, events and not for profits but it could be an option worth exploring.

Raising finance

If you can finance your money making venture yourself then this is the quickest and easiest way to get going. If not, do you have friends and family who would be willing to back you? You really shouldn’t expect them to do this for nothing! Offer them a share in your profits, a decent rate of interest or a free service in return for their support.

Could you bring partners into your venture? Of course if you do they will expect a say and a return on their investment, are you prepared to share your decision making and your profits?

If you are planning to start a business in order to make your money making target then there are other options for raising finance but they have both advantages and disadvantages. You will need to produce a business plan which shows that your business is viable and you will probably need to prove that you have made a decent investment in your business yourself. Why should they risk their money if you won’t risk yours?

Here are some of your options for raising finance for a business:

  • a bank loan: in the UK there is some government backing to help banks take risks, if the bank turn you down ask if they would consider you under this scheme
  • crowd source funding: a relatively new way of raising finance usually from smaller investors in return for shares in the business. You set your goal and don’t get any of the money until you get the backing for all of it. One example is
  • venture capital: this is where a person or organisation with money backs businesses that need it in order to make more money. Venture capitalists will be looking for scalable businesses from which they can make a decent profit. They typically want to own a significant proportion of the business and to sell their share in around 5 years.
  • business angels: rather like venture capitalists but perhaps a bit less aggressive! Whilst a business angel will want to make money out of your venture they will typically share their skills and experience with you and may take a longer term view about making a profit.

ACTION: If you need to raise finance decide which three methods you are going to go for in order of preference and prepare your case. Set a deadline by which you will ask for the backing, add it to your project management plan unless it is already there.

Next steps, should you choose to take them…

  1. Share any insights or recommendations in the comments section here.
  2. Join the conversation on Facebook to gain support from the 21 Day Challenge community (we’ll be looking at some of the benefits of social media later in the challenge but for now being active on this page and on Facebook can help boost the way people can find you on the Internet.)
  3. Tweet this ‘I’m working out how to finance my money making venture #21DMMC
  4. Join us tomorrow to when we’ll be putting together our cashflow forecasts.