Sarah Willingham’s secret to launching your first business

In this piece, former Dragon Sarah Willingham gives tips on how to build the financial spine of your business.

In the UK we currently have 5.4 million small businesses in operation, with this number growing every day as aspiring entrepreneurs pursue their dreams of owning their own business. It’s known that not everyone will succeed, but a stat that came to my attention and shocked me is that two thirds of businesses will fail within their first five years due to cash flow. It’s understandable – owners can become passionate about their product, they can be excited about their branding, and intrigued on the most efficient ways to market their service. What a lot of people fail to get enthusiastic about, however, is the numbers.

British innovation and the ‘stiff upper lip’ mentality that we’re associated with allows us to go so far, and in fact, I’m working with leading cloud accounting software company Xero on a project that shows entrepreneurship is in our blood. One third of UK children want to grow up to own their own business, ranging from vloggers to app developers. Interestingly, half of today’s kids have actually set up a side business, with the little innovators offering people their IT services and the pluckier of the bunch are selling their old toys on eBay. They have the same innovation, the same initiative, and what parents said is they suffer the same problem – budgeting. We’re brought up to chase our dreams, but today’s and tomorrow’s entrepreneurs need to know that the spine of an organisation is their finance department, and it all starts with cash flow.

Why cash flow?

Cash flow is the movement of money both in and out of a company from an exchange of services, investment or other financial activities. To monitor your cash flow, you set agreements and payment terms on when you should be paid – this allows you to forecast your liquidity, and enables you to pay your own financial obligations. However, late payments are costing businesses billions and causes leaders to make tough choices on how to use the cash they have available. It’s a notorious issue, so how can you ensure a smooth cash flow?

Rule 1: Invoice promptly

It sounds simple, but you’ve probably found yourself saying ‘I’ll get around to that when I get the chance’. That’s a terrible habit to get in to, because when neglected invoices begin to pile up, you’re damaging your forecasted cash flow. Make sure the delay doesn’t start on your side, or else you set a bad precedence for the rest of the transaction. You’ll also need to ensure that the correct person receives your invoice, further removing a barrier to prompt payment. The rest is down to proper formatting – send across the details you need on your side and proceed to send a PDF, as Word documents are often not accepted.

Rule 2: Build a relationship

Yes, it’s business, but people are more likely to prioritise partners who treat them as more than just a pencil pusher. Find out the name of the employee handling accounts and give them your patience, passive aggressive emails and complaints will only lead to further delay. If they are struggling to pay on time, hear them out, as undoubtedly your business will have been in the same boat. Treat them with respect and you can bet that your payment will be top of their pile.

Rule 3: Keep accurate records

Throughout a project, extra time, resource and materials can change in spite of the agreed work. This is where you need to keep files and trackers to ensure you know everything that’s gone into the work. Clients can often ask for extras and expect not to pay, you need to be clear and up front that if an additional task has been asked of you, it may cost them money. Same goes with materials used, clients need to be notified that admin fees can fluctuate unless you’ve confirmed a standard rate. What’s more, your staff might not recognise the importance of billable time. They need to understand that their billable hours are a reflection of the income they generate. Make sure everything is tracked and regularly monitored to ensure you’re on budget and the invoice total is correct.

Rule 4: Define your payment terms

It would be wrong to assume that every other company operates on your payment terms. Before signing any contract, you must agree payment terms that suit both parties. It’s easy for the client to insist their standard terms, and once the ink dries, there’s little you can do – you may have to wait an extra 30 or 60 days. You might be lucky enough to survive the delayed payment, but smaller businesses would struggle to do so. The key thing to do? Get written confirmation of payment terms, clearly. If they say ’30 days’, define the end date, or else ambiguity may leave loopholes to pay at the end of the month. Leave no room for doubt.

Rule 5: Offer easy payment method

From the get-go, offer up your favoured types of payments and flag what you can’t accept. This is especially important for international dealings as, more often than not, you’ll need to offer SWIFT and IBAN details. If you make it difficult for someone to pay you, chances are that you’ll drop down the list. The key here is to have a strong online accounting system, such as Xero, which will:

· Prompt you to set up an invoice template with necessary information
· Set up links with online payment and processing systems like PayPal
· Calculate VAT and other statutory costs

Conclusion? Make cash flow a priority

If you invoice quickly and efficiently using the afore mentioned steps, then your cash flow will be in your hands. Not every business starting out can afford an accountant, so search for online tools that will help bolster your operations with a sound financial spine. Xero, for instance, can help you create invoices, calculate cash flow, set up payments, include direct bank feeds and more. Do your research, and find out how these tools can best suit your needs. The Xero cash flow guide can be found here:

Sarah Willingham is an entrepreneur and investor, known for growing the likes of The Bombay Bicycle Club, London Cocktail Club and The Craft Cocktail Company into popular brands.

Further reading on Sarah Willingham

Ben Lobel

Delphine Hintz

Ben Lobel was the editor of from 2010 to 2018. He specialises in writing for start-up and scale-up companies in the areas of finance, marketing and HR.

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