It has been said that 95% of start ups fail through underfunding. This sounds obvious, a company does not make enough money so that company does not have enough money so it runs out of money so it dies. If any company had infinite money it would have to succeed in the end .

In reality the problem is often about cash flow rather than income. That is to say the company is profitable in absolute terms but it does not have a cash buffer to allow it to bridge the gap between costs and revenues. A business can be making far more than it is burning and still be killed by lack of money.

I am told that Norman Tebbit encouraged companies to try to shore up their own finances by simply not paying their creditors until they were forced to. Now I do not know whether there is any truth in it but as a piece of advice from a politician it stinks. It is not just that it messes up a company’s finances by making the cash situation difficult to manage. More important is the knock on effect.

Large companies have the financial strength to survive people failing to live up to their responsibilities, but small companies can be killed that way. There is even more to this than the negative effects on the economy of all the small companies being killed off preventing the growth they provide. When it is not possible to source from more efficient small companies, whether because they are dead or because they require payment in advance, then choice is restricted. Any time choice is restricted you are less likely to be able to get what is best for your company.

So if people are avoiding payment they are endangering not only the companies that they fail to pay, but through the effects they are actually endangering themselves. If we set that aside, it is still clear that companies do avoid payment and that this can kill companies.

The fashion industry is particularly bad for this. I had one friend I worked with who had been in fashion. He had always been successful as his brands were popular. Sadly he had been driven to liquidation by people failing to pay on time. To give a feeling for how bad this was, after we had been working together for six years he received a payment that had come due at a time when it could have staved off the liquidation.

What can be done to avoid the problems this causes? Well that is really a whole series of articles in itself. All I will say here is that if you are aware of the problem it is possible to try to guage the likely actual payment time for a customer and include a healthy margin for non-payment and delayed payment in all financial projections. When raising money make sure to include a healthy cash buffer for when the business is making money but not actually receiving it.

Rufus Evison