Entrepreneurs

Billionaire Richard Branson: This is 'the biggest killer of start-ups'

Richard Branson at the 2105 CGI Annual Meeting in New York.
Adam Jeffery | CNBC
Richard Branson at the 2105 CGI Annual Meeting in New York.

According to billionaire entrepreneur Richard Branson, 2017 is an ideal time to start a business.

"New technology, and a generation of customers who are ready to embrace it, have removed a lot of the barriers to entry for start-ups, making 2017 an incredibly exciting time to do business," the Virgin Group founder writes on his blog.

But, he notes, if you want any chance at succeeding in the start-up world, you have to stay on top of your finances: "Poor cash flow is the biggest killer of start-ups. A recent study showed that as many as 82 percent of start-ups fail due to poor cash flow management."

In fact, Virgin was nearly a part of that 82%. "In the early days of Virgin we came very close to the bank closing us down due to cash flow issues," Branson writes. "It ultimately became the reason why we had to sell Virgin Records — to free up cash to make Virgin Atlantic a success."

In order to effectively manage your cash flow, Branson says to start by building a financial forecast for your first year of business. That essentially means following these three steps:

  1. Identify your expenses, which could include office rent, internet, insurance, legal fees, advertising and salaries.

  2. Build two sets of revenue forecasts: A conservative one and an aggressive one.

  3. Double-check that your forecasts are realistic by considering three key ratios: The ratio of total direct costs to total revenue, the ratio of total operating costs (direct costs and overhead) to total revenue, and the ratio of your employees to clients. After all, "if you predict bundles of profit but actually get a whole lot of loss, then you'll be out of a business," the billionaire says.

Read Branson's full post about how to create a financial forecast.