Why Start-Ups Suffer Cash Flow Problems

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Forecasting Cash Flows Cash flow Cash flow describes the movements of cash into and out of a businessWhen you look at the bank statement of any business, you soon realise that cash flow is adynamic and often unpredictable part of business life. In business, cash is always on the move… • Cash flows into the bank account when customers pay for their sales, when a loan is received from the bank, interest is received or when assets are sold • Cash flows out of the bank account when suppliers are paid, employee wages and salaries are paid; interest is paid to the bank and so onYou need to be able to distinguish between: • Cash inflows: movements of cash into a business• Cash outflows: movements of cash out of the business The difference between the cash inflows and cash outflows during a specific period (e.g. aweek, month) is known as the “net cash flow”.The challenge for any business (particularly a start-up) is to ensure that it manages its netcash flow to ensure that it does not run out of money. Main types of cash inflow and outflow The main types of cash flow can be summarised as follows: Page 2 Why start-ups suffer cash flow problems Start-ups and small businesses are especially vulnerable to cash flow problems. Here aresome of the main reasons:Firstly, it takes time before the business makes its first sales – the pre-trading period ofteninvolves incurring costs without getting any revenue in return. For example, before it can begin to trade, a new shop has to pay for: • Shop-fitting and merchandise to fill the shelves (stocks)• The initial rent of the shop (note – it might be possible to negotiate a rent-free period) • The wages of shop staff to get the store ready for trading Suppliers may also demand immediate or early payment from the start-up as the businesshas not developed a track record for paying bills on time.A new business usually has to spend up-front

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