Starting A New Business

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How to Start a Personal Business

Executive Summary

The biggest problem a new private business faces is the cash flow management. Usually

businesses underestimate its importance and fail to see the potential this strategy can do to

maximize the profits of the business. This report discusses the problems that are caused by this,

along with the reason behind their causes. Moreover, it also discusses the recommendations

which are divided into two categories: the short-term and the long term. The short term focuses

on the benefits that the business would gain within the shorter time period and the long term

focuses on a longer time period benefits. Lastly, it is stated that business should keep in mind its

importance because 82% of the new business that fail to run in the market, are shut down

because of overlooking this aspect.

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Introduction

Starting a new private business is always a tough task especially when it comes to

starting a personal business. Although the problems faced in the early stage are limitless, the

most difficult one includes the management of the cash flows of the organization. This includes

all the cash inflows and out flows of the business. Moreover, apart from the hectic work that

starting a business requires, it also demands that a person be fully committed to it for it to

function in its maximum capacity.

Entrepreneurship is not an easy road to walk on. The initial few aspects a person must

keep in mind before starting a business include the opportunity costs of doing a job, finances,

team collaborations along with team building, and as a leader, having a vision for the future.

Entrepreneurship demands that a person be fully dedicated to its task, which may include trying

to establish the brand name, adjust to the competitors within the market, and stay profitable as a

business (Alton). However, these problems are faced by the individual who started the business.

The biggest problems that the business itself faces is maintaining a higher level of inflow of cash

than the outflow of cash.

Literature Review:

According to a study by Jessie Hagen, 82% of the businesses fail to perform within the

practical world due to a poor cash flow management system (Flint). In the simplest of terms, a

bad cash flow management system is the one which involves a higher value of outflow of cash

than the in-flow of cash (Ward). Moreover, a recent study showed that only 12% of the new

business do not run into cash flow problems which the remaining face it (Buck). As a new

private business within the market, the most important aspect is to have as much liquidity of cash

as possible. For example, the in the case of real estate businesses, they have to invest a lot

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initially, which implies that the outflows of cash are more than their in-flows at the start.

Although in this specific example, the investor has no choice but to invest in the property, he/she

can control other expenses such as operating and administrative expenses. Businesses such as

these can easily run into cash flow management issues and run out of business because they are

forced to sell below their profitable amount. Moreover, another problem that business face in the

form of cash flows are the invoices they give to some customers. These invoices are usually

based on a 30-day to 60-day terms. However, the chances of customers turning into bad debts is

also a possibility which can greatly damage the cash flows of a business. Moreover, another

problem that businesses might run into is the hiring of employees.

Figure 1 Cash flow importance in business success

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In a an ideal world, the customer would pay for the products/services he/she has purchased, but

in the real world people often remain reluctant to pay even after the term of payment has been

agreed upon (Rampton). Moreover, new private businesses often fail to recover bad debts within

time and not at all sometimes, which reduces their inflow of cash and causes disturbances within

their cash flow management system. Bad debts are simply put those account receivables which

fail to pay back the amount they owe to the business. As far as the giants of the industries are

concerned, they can easily recover from such cases because they usually have deeper pockets.

However, in the case of a new private business, the budget allowed for such cases is low and it is

preferred to keep the risk at a bare minimum. The reason is that at the initial phase, businesses

cannot afford such loses, because they pollute the brand image for the business. For instance, a

company ABC who gave a customer goods worth of $500 on the condition that he would pay

them back the due amount within the next thirty days. However, after the appointed term, the

customer comes back and returns the goods after using them saying that he has gone bankrupt. In

such cases, the company cannot do much and is forced to incur the loss on that sale.

Problems such as these are also caused by the businesses overlooking the cash flows of

the business until it’s too late. Although some may argue that the problems and losses should be

delayed for as long as possible. However, incurring a small short term loss is far better than

incurring a large long-term loss. Companies usually have a priority matrix for such actions so

they know which action should be performed at which time interval. The reason for such

management is necessary because businesses assume that if they have a net profit that mean they

are profitable. However, while it may sound counter-intuitive, just because a company is

profitable doesn't mean it can't have a cash flow problem (BlueShore FInancials).

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Figure 2 Priority Matrix

Recommendations:

Cash flow problems are a serious issue for any business and should be treated as such

from the beginning. So the recommendations have been divided into two criteria which include

the short term benefits, and the long term benefits.

Short-Term benefits:

As a new private business, the following recommendations would assist in managing the

cash flows more effectively in a short-term time period.

 If the estimates for the initial year of the business seem high, it is better to take a

loan against the assets of the business. These loans are typically short term based

and are based on the cyclical working capital requirements (Murray).

 Sell or lease out any assets the business is not currently using. For example, a

spare office which is not required by the business.

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 Acquire a small business line of credit. This option is valuable for new private

business which might not require access to large amounts of cash right away but

would require a small amount. Moreover, the repaid payment is usually between

four to six months.

 Another aspect that business should care about is the invoicing process. If the

invoicing process is too complicated and not cost efficient, it can have a negative

impact on the cash flows of the business. So the invoicing process should be clear,

concise, and most importantly be delivered on time.

 The payment method also pays a role in how easily the customers would pay. For

instance, if a company asks its customers to pay only via cash in comparison with

a company which accepts all certified payment methods, the customers would feel

more ease with the latter. This can be done by setting up an auto billing strategy,

accepting online bank transfers, encouraging early payments, and allowing the

customers to choose the date of payment.

Long-Term benefits.

 Businesses that deal in products/services which require a substantial amount of

cash can ask for a deposit from the customers to ensure the reduction of bad debts.

 Build strong relations with the suppliers are develop a strategy to reduce the cost

of the raw material, which would reduce the out flows of the business.

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 Employ strategies which give customer more value if they pay early. For instance,

giving a 5% discount on paying within the next 5 days rather than the agreed

term. Incentivizing the customers to pay early, greatly helps the cash flows

because the business is assured of the sales and the chances of bad debts occurring

are greatly reduced.

 Downsizing of expenses or at least delay them for as long as possible. It’s

important to note that the expenses should be delayed, but not the losses because

if losses are delayed they usually tend to increase.

Conclusion:

Although new private businesses face a lot of problems, the most trouble-making one is

managing the cash flows of the business. Although this seems like an easy task, rather most of

the businesses struggle at this point. According to an estimate, 82% of the new businesses shut

down because they fail to manage their cash flows properly (Flint). Managing the cash flows

means to ensure that the inflows of cash within a business remain higher than the out flows of

cash within a certain time period. The importance of this process is usually undermined because

businesses consider the cost incurred per unit of production as their absolute value. However,

there are various other factors involved which contribute to the cost incurred to the business such

as, administrative expenses, or marketing expenses et cetera. Thus, for a new private business it

is crucial to keep in mind the importance of cash flow management and follow the strategical

guides to ensure maximum profits for the business.

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Works Cited

Alton, Larry. "The 8 Biggest Challenges for New Entrepreneurs." Entrepreneur 07 Jan 2016.

BlueShore FInancials. "Effective cash flow management." BlueShore FInancials 2015.

Buck, Shaun. "5 Marketing Missteps That Make Cash Flow and Business Growth Stumble."

Entrepreneur 25 Jan 2018.

Flaxington, Beverly D. "Developing Time Management Skills." Psychology Today 27 Jul 2015.

Flint, Michael. "Cash Flow: The Reason 82% of Small Businesses Fail." Preferred CFO 08 MAr

2017.

Johansson, Anna. "The Top 4 Hiring Challenges Small Businesses are Facing." Inc. 02 Mar

2017.

Murray, Jean. "Cash Flow Solutions for Businesses." The Balance 02 April 2018.

Rampton, John. "What to Do With Bad Debts On Your Books." Entrepreneur 31 Mar 2017.

Thomas, Maura. "Your Team’s Time Management Problem Might Be a Focus Problem."

Harvard Business Review 27 Feb 2017.

Trimarco, Gina. "Overcoming The 'Hire A Warm Body' Mentality." Forbes 13 Jun 2017.

Ward, Susan. "Define Cash Flow Management." The Balance 08 Jan 2018.

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