As something of a serial entrepreneur, I’ve been starting up and running businesses for over twenty years. Before Longcroft Soap Company and gracefruit.com, I had several companies.
I’ve shipped cars from Germany to the US, recruited computer programmers during the height of the dot com boom, and even taught etiquette to children. It’s fair to say my experience is diverse.
While all of my companies have been very different, there are certain rules of business that I’ve applied to all of them - and the cardinal rule is the same no matter what kind of business you’re running. You must watch and maintain your cash flow.

To understand why maintaining cash flow is vital to the success of any business, it’s important to first understand exactly what cash flow is. A common mistake is that cash flow is the same as profit, which isn’t exactly true. While profit can lead to cash flow, they’re not the same thing. Cash flow is the pattern of income and expenditure your company experiences over a given period. To maintain any business, you must have a steady stream of cash ready to pay for all necessities. If your cash flow stops and you can’t pay for the items you need for your business, your business will fail. To avoid this, you’ll need to forecast your cash flow needs at least 30 days in advance. As your business grows, you’ll want to forecast even further. Six months is better. Twelve months is ideal.

Forecasting helps you to look at money coming in versus money going out, and can help you spot trouble before it’s on your doorstep. Try to estimate the bills due over the next 30 days and plan your payments. Remember to include the costs for raw materials, rent for premises, taxes, equipment, wages (if you have employees), repayments, and your contingency budget.

Now look at the money you have coming in for the next 30 days. While it’s sometimes difficult to determine how much you can expect, looking back at past months can help. Always be conservative and realistic with your estimates. Pay close attention to when your bills are due over the next 30 days. Will you have enough to cover each bill as it comes due? If you do, great! If not, you have a cash flow problem. But don’t panic. The fact you can see a problem coming gives you time to react.

Cash flow problems don’t just happen. There are a few common causes:

Poor stock management – while it’s tempting to buy in bulk to save money, sometimes the savings aren’t worth the dent to your cash flow. Spending £100 for ten kilograms of mango butter may seem smarter than buying two kilograms for £25, but that extra £75 could come in handy when your taxes are due in a week’s time.

Borrowing too much – financing is not always the best option when starting a business. Many new businesses find themselves over-financed, and the burden of the repayments zaps the cash they need for necessities like rent and raw materials.

Offering terms – we all want sales, but offering credit to customers can cause serious damage to your cash flow. If you’re depending on that £200 repayment from your customer and it doesn’t come, the worst case scenario is that it could mean the end of your business.

Failing to recognise any of these potential problems can result in insolvency and failure. By no means is this a comprehensive list. Even the loss of a customer or a supplier can result in cash flow problems. Sometimes it isn’t possible to avoid difficulties with cash flow, but forecasting will help you spot problems while you still have time to do something about them.

There are no quick fixes for cash flow problems, but looking ahead and avoiding common pitfalls can help prevent disaster.