A start-up is a fragile entity which requires cash to survive and grow. We reflect on the lessons we’ve learnt in the past 6 years of growing Stuff U Sell.
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Smarta recently published an article on home-working and the FT published an interview with us discussing our views on cash management. Both left us looking back on how we have been able to grow Stuff U Sell into the UK’s leading eBay Trading Assistant over the past 6 years without requiring any external investment.
When we first offered the Stuff U Sell service, it was an experimental idea and we didn’t know what people really wanted or were prepared to pay for. It was vital that we operated as cheaply and as flexibly as possible. This meant following the long-held tradition of entrepreneurs and doing absolutely everything ourselves and basing the business in a spare bedroom. With not much more than a mobile phone, a laptop, a camera and a rented van, we were able to provide a service to our early clients. It was a real privilege to be invited into their homes and to discuss with why they wanted our help, and in our first few years of riding round London in a van we got to know our customers extremely well. We also learnt a lot about lifting furniture.
They key to that phase of the business was to develop a product which people were willing to pay for, but without wasting thousands of pounds ramping up a business which might not work. It was an attitude of learning and cost-effectiveness which has never left us.
Eventually the spare bedroom and the rented storage space were no longer sufficient for the volumes of goods which we were handling, and we needed to take the first big investment of warehouse space. Soon after this we started hiring employees to work in the business and we never looked back. The key was that before we spent any money we had nearly two years of experience and knew exactly how to forecast our growth. We now sell over £1m of goods a year with from a 16,000 sq ft warehouse, employing 16 staff.
To succeed, it is important to understand what failure looks like. All businesses fail in the same way: they run out of cash. It is important — particularly in a small business to keep ruthless look-out on your cashflow. When we first made the decision to take on warehouse space, and with each of the the subsequent hires and investments in equipment we looked at our cash balance and figured out how quickly we would either need to sell more or go out of business. Our cashflow forecasts became so accurate that we would always know the date in the future on which we would go out of business if we did not hit monthly sales targets. This is a discipline we still follow today.
Having established this date, our focus was to push it out further into the future. You have four basic ways to do this
1) increase sales
2) decrease costs
3) shrink working capital or
4) extend lines of credit
The first two tend to come naturally — we are trained to think about profits (the difference between sales and costs). In strongly growing business, however, it is still amazing how much can be saved by regularly reviewing contracts as you pass volume requirements for discounts. We now buy our packing materials by the truckload and get a much better price than we ever did before!
Working capital is the silent killer: Many fast growth businesses fail because they end up buying so much stock they can’t meet current bills, or they are paid too late by customers: expansion can send you under. Managing credit terms — both those extended to you by your suppliers and those you offer to your customers can really help in this regard. 30 days is standard for many goods and services between businesses, so if you are quick then often you can sell to a customer before you need to pay a supplier. Other areas where working capital can be invisibly soaked up are in payment transfers from banks and credit card processors leaving many days sales tied up.
We designed our business to have very low working capital requirements and managed credit terms wherever possible to keep the required cash as low as possible.
The final lever is the line of credit. This is the lifeboat. It’s often lamented that banks will only offer you a loan when you don’t need it — so negotiate the loan or overdraft facility when you don’t need it and have it there for if you should. If the unexpected happens and you should need to fund a further 6 months of expenditure then make sure you have that facility in place. We developed a very good relationship with our bank manager so that he understands our business and how it works and happily pay for arranging an overdraft facility each year which we have barely needed to use.
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It may seem negative to detail how to focus on avoiding failure, but all successful businesses have done it, and eventually when you can switch from worrying about survival to worrying about growth, you will find that you are well on your way already.