In a 2016 survey of 1800 SMEs across the UK, Europe and the US, 55% identified cashflow as the biggest obstacle to growth, and more than 40% had a greater need for working capital, compared to 2015.
Without healthy cashflow, growth can be difficult to achieve. Investments cannot be made into new equipment, new markets cannot be explored and new staff cannot be hired.
Sara Allen, founder of job-sharing agency, Further&More, decided very early on to “bootstrap” her business and trade skills with other experts to keep costs down. She has worked with specialists in marketing and PR, had help with branding and has plans to engage in an indirect swap with a lawyer.
“The thing I’ve found is when you’ve got a good idea and people are excited about it, they do offer interesting ways of helping out, which is lovely. To that extent, cashflow has been about trying to not need any cash, rather than actual money. The interesting point we’re at now is we need to grow, so I’ve been thinking a lot about what that next step looks like.”
Allen works with large companies to promote job sharing among high-level executives, particularly mothers transitioning back into work life. It can be a long procurement cycle - job sharing is not widely known and although it is often a good solution to the female “brain drain”, it is not one many executives have considered before. But the rewards can be great - pilots currently in the pipeline will be worth in the region of £500,000 when they come to fruition. That would beat Allen’s turnover goal for their first year by 500%.
“One of the reasons we’ve tried to be creative with our time and money and budget is because I recognise this is going to take slightly longer than we thought,” she says. She’s now considering taking on investors to raise the £150,000 she needs to grow the team and pursue more opportunities. She also recognises that while pursuing equity investment will mean giving up a percentage of her company, the value that seasoned investors could give her in terms of contacts and expertise are worth it.
“My thinking is there is a prize to be won in this space at the moment. I want to change the way people work and that means we need to do it fast, faster than I can do on my own.”
That urgency that many entrepreneurs feel in the early days can lead to difficult decisions being made about finance. Signing a deal with a big supplier such as a supermarket, for example, can open small businesses up to bigger issues with late payment. SMEs wait 72 days to be paid on average and are typically owed £12,000 each.
Research by Amicus Commercial Finance, involving 504 UK SMEs, found 38% of small businesses have suffered cashflow problems over the past two years. Some turn to invoice financing to bridge the space between invoicing and payment - a practice that is growing. The asset based finance industry (of which invoice financing represents 80%), was estimated to be worth £711m in the first quarter of 2016, a 63% rise on the same period last year. Experts suggest that the sector’s growth has been due to the decline of banks lending to small firms. New legislation passed in November, means banks are now legally obliged to refer entrepreneurs to alternative lenders if this happens.
But Darren Fell, CEO, Crunch Accounting is cautious about using asset based finance to solve cashflow issues and says it can be a slippery slope. “There are amazing solutions out there but you’ve got to really know what you’re doing - it can cost a lot of money,” he says. “I just boil [the principles of cashflow] back to the absolute basics - it’s down to getting the money in the door as fast as you possibly can. The second you’ve closed that deal, the invoice goes out.
“Don’t give credit terms as if you’re a bank - you’re not. Give seven days, or 14 days if [the invoice] has to go through a big finance department. And ask for 25% of the money as a deposit on the project, payable immediately.”
Crunch was set up in 2009 and now works with nearly 10,000 micro businesses. Fell says for him, the key to managing cashflow has been getting a handle on every penny coming in and going out.
“I have to confess, I’m not very good with numbers,” he says. “But everyone is capable of writing everything down. You have to be so lean. It’s eight years after we launched and we’re approaching £10m turnover, but we’re still so careful. Stay with it, every single penny.”
One entrepreneur who understands the importance of being lean is Carolyn Pearson, who, like Allen, is also a fan of bootstrapping. The ex-IT expert set up her network for female business travellers, Maiden Voyage, in 2009 while she still worked at ITV but left the workforce in 2013 to focus on it full time. The network now includes 8,000 women in 80 countries.
Cash comes from a variety of revenue streams, including web advertising, corporate clients, traveller safety training classes, and hotels that are judged to be female friendly. Pearson says cashflow has always been at the forefront of her mind.
“The biggest thing I can do that impacts the business and is very low cost is all the opportunities I get to speak at travel industry conferences, a free and effective way of marketing, building our brand and filling up our sales pipeline,” she says. “And when we raise an invoice, we contact the client just afterwards to check that they’ve got it and that everything’s correct. Although we know many of our clients have payment terms of 30 or 60 days, we set ours at 14 days so we can start chasing from day 15 [and are] front of mind.”
It wasn’t until this year that Pearson felt she could take external investment help, which allowed her to grow her team of six people and focus more on the strategy and growth of the company.
“I did reach a point when my back was against the wall and I thought I might not be able to pay my half of the mortgage,” she says. “It wasn’t until we pivoted the business model [to corporate memberships] that things started to turn around. [Investor Tony Rice] chased me for three years but it was only when I was confident in [the business model] that I was able to take his money with a clear conscience.
“Because we’re breaking new territory, it’s been like turning an oil tanker around … actually just staying in business for a long time means [people] see you as a credible organisation. We’re now talking to some of the world’s biggest organisations and are at a key stage. The oil tanker is on the final stage of its turn.”
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