True Business- real life for small businesses

One of the things you get used to when you start your own business is living on fresh air. It’s an acquired taste, but if there’s one thing I hear all the time when I speak to new entrepreneurs, it’s their shock at how fast money can disappear.

Unless you’re very rich, or very clever, the following advice from hard experience will help you get started in business:

• Think how long it will take you to get your first customer. Now double it. Add two months to get paid. That’s when you’ll get your first scrap of money coming in.
• Think how long you can last with the money you’ve got in the bank. Now trim that by 25% to account for the way things really work in life (unexpected nasties like car repairs or boilers with a habit of blowing up). That’s how long you can really last.
• Now think of what sort of profit each deal will get you. Halve it, to account for the fact that when you start up, you’re constantly buying bits of equipment you didn’t realise you were going to need. That’s how much money you’ll really get.

Now that I’ve scared the living bejeezus out of you, don’t panic. You’re now much better prepared to deal with cashflow in a new business. Don’t let me put you off: just be realistic about cash, and learn to live on fresh air.

I say this, because I was given a great piece of advice by one of my mentors, which has never been more true than today. Try to fund your business from revenue. In other words, don’t borrow unless you have to. Do anything you can to spend your own money and money you earn; not someone else’s money. The banks are simply not lending to anyone, and if you’re in hock to a bank, they can turn off the taps without any warning.

I started my company with a moderate redundancy payment. I extended my ability to survive by taking jobs on the side (as a very bad DJ). My first paycheque only came 3 months later, and amounted to the princely sum of £240. If it had not been for the DJing, and the generosity of people at weddings and in pubs willing to put up with my terrible taste in music, I wouldn’t be turning over a tidy sum each year today. I am forever grateful to them.

I am still religious about cash. I have never borrowed a penny from the bank, and I am now in the lucky position that I have modest cash reserves in the business to pursue new opportunities. If we need new equipment, we can buy it. If a job is going to need a float of £5000, we can cover it. That’s not a boast – it’s an important part of being prepared.

And let me tell you: that makes me boring. When we were young, the only cool kid to have spectacles was the Milky Bar Kid. I suspect the Milky Bar Kid is now an accountant (and he won’t be flagrantly shouting “The Milky Bars are on me!!!”). From Dan Dare to Dennis the Menace, the essence of cool can be described as follows: nobody likes a smart-arse. Being sensible with money is rather prissy. Which is why even though entrepreneurs have a reputation for being risk-takers, secretly, underneath it all, without telling anyone, they are annoyingly sensible.

My problem today is that nobody’s getting any credit for being sensible. Last week, I stopped being a saver. Largely for the tax benefits, I’ve put some money into an ISA (tax-free savings account) for the past four years. But now, the savings rate is minimal. Whereas, my mortgage rate has remained stubbornly high, as the Alliance & Leicester has resolutely refused to pass on all of the recent base rate reductions. In other words, my reward for being a good saver is that I have the pleasure of paying A&L about 3.5% more money.

I have therefore closed my ISA account and taken a lump sum off my mortgage instead.

Now, I know that’s my personal finances rather than my business finances, but the issue is the same: there is absolutely no encouragement for people, or businesses, to save money; at precisely the time when we need to encourage everyone to put a bit aside. Never mind saving for a rainy day – this is the rainy day.

My advice is the same for both business and personal finances.

If you are used to saving in order to make a bit of money from the interest, forget it. It’ll be a good while before that makes sense. Use the majority of your savings to pay off any personal or business debts.

However, do keep some cash aside as a reserve: not to make money, not as an investment, but as a cushion against the bumpy ride of the economy. Don’t expect interest - you might as well keep it under the bed. But it’s still worth having, to dip into when you need it.

Saving for profit is dead. Saving for security has never been more important. The Milky Bars are on me!

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