Q&A - Why are start-ups vulnerable to cash flow problems?

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Start-ups and small businesses are especially vulnerable to cash flow problems. Here are some of the main reasons:

It can be a while before the business makes its first sales – the pre-trading period often involves 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
• 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 business has not developed a track record for paying bills on time.

A new business usually has to spend up-front on expenses such as marketing and product development.  The development phase of coming up with a new product may take some time – research, design, testing and similar activities all consume cash without generating any revenues.

Finally, the new business will not have reserves of cash built up from profitable trading – an important source of cash known as “retained profits”.

During the early months of trading, therefore, a start-up business faces its most significant challenges in managing cash flow. Without careful management and planning of cash, the business may run out of money. 

You can probably see why cash flow problems are a major cause of business failure amongst start-ups.

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