Monday, November 08, 2010

Reasons for Business Failure Part 2: Cashflow

We're all aware that the Credit Crunch drastically limited the sources of finance for small businesses. The media is full of stories about how SMEs (small/medium sized enterprises) are not getting access to loans to help their cashflow or to fund further growth. Accountancy organisations such as the UK's ICAEW give firm advice about small businesses having to provide good reasons for needing capital injections.

That's just one more reason why business owners need to be realistic about their survival costs before they start a business. All businesses need startup capital, to cover the initial outlay on property rental, vehicles, tools, overheads, stock, office equipment and stationery, fuel costs, etc. The new business owner also needs to ensure that their personal overheads, such as mortgage/rent/loans, household expenses, personal vehicle & fuel costs, are also covered.

Traditionally, business advisers suggest that most small businesses take up to three years before they are fully profitable. That's three years where, every time you take money out of the business for personal use, you delay the point where your business "breaks even" and moves towards profitability. The more net profit you can invest in your business in the early years, the earlier your business will break even.

If you need an income of £2000 ($3000 or 3000 euros) per month to survive on before you start your own business, ask yourself how you will fund that income in the first 3 years of running your own business. If you can't fund that income out of savings, where is the £72000 coming from? From redundancy payments? From family? From another income in the household?

Or would it be better for you to build your business part-time, in parallel with an existing job? Can you do that with your current skill set? If you can, how will you get customers? How will they pay you? Will you need to take time off your existing job to visit prospective customers, or can you sustain business growth outside of your existing workday?

All of these questions need answers before you build up your own business. It's part of making sure you're not a business failure statistic in 6 - 18 months time.

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