Cash is king

Over the next several weeks we will be publishing extracts from:

Take The Plunge – 101 things you need to know before starting your own business

by Michael Carter

 This week: Cash is king

Repeat the refrain: ‘Cash is king’. If you don’t ever take more than a single thought away from this book, make sure this is the one you do. Make it your personal mantra.

Businesses that go bust usually do so because they run out of money. In fact the definition of insolvency is not being able to pay your debts as they fall due. Not necessarily that you have not made profits but simply that you can’t pay your way.

Of course it can happen that what you have invented and believe to be very clever, just doesn’t sell. You see such things on TV programmes like Dragons’ Den, all the time, but believe us, it is usually the money running out that will bring you down.

There are two big ‘be awares’. Firstly, when going into business (or even buying a business) it is important to have enough funding in place. While we look at raising money later, it is enough to know now that at the beginning you are likely to be most optimistic and therefore very likely to under-estimate both the cost and time taken to start making money. ‘Twice as long and twice the cost’ is rarely far wrong. How? If you need premises for instance, you need to allow for rent, often from before you start, but you will probably also need to pay a rent deposit and hire a lawyer to negotiate your lease. You also need to live, pay for your own food and house mortgage etc while the business gets started. And if it takes twice as long…???

Secondly, make sure you understand not only the pricing structure of your goods and services but also the payment terms your customers will demand from you. Particularly if you are selling to bigger retailers you will find they pay you on their terms and not yours. Department Stores and Supermarkets think paying 90-120 days after receiving goods is ‘normal’. And if they have any query it might be much, much later. While on this topic it is important to make sure the customer is going to pay at all (see ‘Credit Control’) and to be very wary of deals involving ‘sale or return’ where months after a sale, even months after you’ve been paid, your customer returns almost all you sold them and demands a full, immediate, cash refund.

Top tip: If you are to give anyone credit, set up and follow a formal debt chasing process and stick to its timetable with all credit customers

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