Innocent drinks was started by three young friends who had the bottle to pack in their jobs and take a gamble on their idea.

Richard, Jon and Adam had always wanted to work together.

They had a good idea for a business: making and selling smoothie drinks.

Before packing in their jobs they went out and tested the market.

They bought a pile of fruit, a couple of blenders and took a stall at a music festival.

"We put out a big bin that said Yes and a big bin that said No, and put a big sign over our stall which said: 'Should we give up our day jobs to make these smoothies?' explains Richard Reed.

Richard Reed: "Two and a half years in and we've broken even, which is a fantastic position."

"We asked everyone who bought our smoothies to put their empty bottles in one of the bins.

"Fortunately the Yes bin was pretty full, so that gave us the confidence to resign from our jobs the next day."

Had the bottle

But to go from the stall to selling thousands of smoothies a week, the friends needed cash.

They not only had to buy a lot more fruit, they also had to pay for things like refrigerators and delivery vans.

They got the backing of a Business Angel - that is an investor who was sufficiently convinced by the strength of their business plan to put money into the business.

And with each new order of smoothies they sold, they were able to put their own money back into the business.

"There have been some months when we've made profits, some months when we haven't made profits," says Richard.

"It very much goes in cycles. You might make money for a couple of months, then you have to hire some new people, buy a new piece of juicing kit or a new van, then you stop being profitable."

Cash flow

Innocent drinks have got the balance right.

They've made sure that they've had the cash in place to cover all their spending. Now they have a healthy income to rely on from selling drinks.

Adam Balon: "My worst moment: our bottle supplier called up and said next week you can only have half the number of bottles."

And two and a half years in, they've broken even overall - well ahead of their business plan schedule.

Part of their success is down to the way they've marketed their product. They use the labels on their bottles to keep in touch with their customers and to have fun.

It's a fresh approach aimed at people having lunch on the run who are looking for something different.

And something different is in the offing. They're now investigating whether to launch a new range of drinks - Veggies!

---

Student Guide

---

Richard, Jon and Adam tested the market to make sure people liked their product.

That was the easy part.

It's much harder to be sure that the cash will flow smoothly once you start a business.

Richard summed it up when he said: "You can start a fruit juice business with the money you've got in your pocket.

"You can go out and buy whatever fruit you can afford to buy, then turn it into juice, then sell it and then use the money from selling that juice to buy more fruit the next day."

If you work like this, you never hit a problem but the business will never grow beyond the number of smoothies that can be sold in a day.

After that income is used to pay for ingredients, time and selling the product. There won't be much left.

Getting commercial

Richard said: "Once we had got passed the Yes and No bins, we wanted to run the business on a more commercial scale.

"So we needed things like a refrigerator, a van to deliver the juices, some fridges to put the juices in - things like that required a bit of investment up front."

Just think...

Is there a business that you know all about?

What does it make? What service does it provide?

What does it have to pay out before it makes anything?

Where does its money come from?

What will happen if the money doesn't come in fast enough?

What will happen if it flows out too fast?

What goes wrong?

There are plenty of things that can go wrong when cash flow isn't managed properly. Here are some of the more common problems:

Plenty of orders but not enough cash to buy the supplies needed to provide them.

The cost of meeting interest payments on money borrowed can exceed available cash.

Sales fall unexpectedly so businesses can't pay the bills.

People don't pay their bills leaving a company with no cash.

The economy takes a turn for the worse leaving the business short of cash.

An unexpected crisis causes a fall in business, for example foot and mouth or terrorism.

Just think?

What sort of changes might make things difficult for the businesses you know?

Keeping control

Many businesses have gone under because the cash flow went wrong.

A business that can't pay its bills is insolvent. Sometimes it is impossible to avoid but it's always worth trying.

Every month

Add up all the income - the cash inflow.

Add up all the expenditure - the cash outflow.

If inflow is bigger than outflow, phew! It's all OK this month.

If outflow is bigger than inflow - there may be trouble if you haven't got enough working capital to bridge the gap.

Working capital is the money in the business that bridges the gap between buying the resources to make your product and receiving payment from the customers.

Just think...

Draw a bath but leave the plug out.

Will there be water in it if inflow is bigger than outflow?

What about if the outflow is bigger that inflow?

Looking ahead

A business can't just work from month to month. It needs to look ahead.

Even a brand new business will be asked to look ahead if it wants to borrow money to help it get going.

By looking ahead, it makes a cash flow forecast.

This shows how cash inflows and outflows are expected to change over the coming months.

A business may have to change its plans if things look difficult.

Just think...

If the forecast doesn't look healthy, what might the business do to stay on the right track?

Have a look at the list of problems above and think about how a business might overcome them.