Running out of cash is one of the quickest ways to go out of business. It’s listed by CB Insights as the number two reason for startup failures. Around 29% of startups who closed in 2018 failed because of inadequate funding. Managing cash flow is critical for every stage in the lifecycle of a company. Cash is the lifeblood of business but keeping track of money coming in and out can be a challenge. The key is to be smart in your spending. Learning to better manage cash flow management is a major factor in success.
What is Cash Flow?
Cash flow is the money that is moving in and out of your business each month. Cash comes in from customers who are buying your products or services. It can also be account receivables if customers failed to pay at the time of sale. Cash goes out of your business as payment for salaries, rents, mortgage, and taxes. A large part of your accounts payable may also be from resources needed in the production of products.
Why Controlling Your Funds is Important
- Small Initial Capital. Most startups do not have much capital. This limitation is a constraint on the kind and size of investment in assets a business can make. It’s so important to put your limited capital to the most productive use to preserve this limited resource.
- Investor Sentiment at Stake. A new business needs to build and maintain investors confidence. When a firm is unable to meet very important expenses due to a shortage of cash, it may lose market share and move farther away from break-even. Investors may not like this, and the firm could lose prospects for future funding.
- Liquidity Requirements. Liquidity is the ability to cover immediate and short-term debts and obligations. It’s a way of describing how well you can cover your current liabilities using your current assets. Putting efforts to maintain a positive cash flow helps establish a firm’s liquidity.
- Need to Attract New Customers. You may need significant funding to do large sales promotions to encourage trial and early adopters. Be careful in managing sales and marketing expenses until you reached the growth stage.
- Ad -hoc Expenses. A new company may incur unexpected expenses that can be difficult to predict. It can be a challenge to manage cash and meet all the expenses when required.
- Hiring and Retaining Employees. Companies need to provide a competitive salary and industry standard benefits to retain employees and attract new talent. Missing payroll because of poor cash flow would be devastating to a business.
What are the Best Ways to Manage Cash Flow?
The Accountancy Cloud suggested these top five tips to manage cash flow for startups:
- Understand Where Money is Coming From…And Where It’s Going – The first step is to understand where your cash is coming from and where it’s going out. A cash flow statement can be beneficial to help track this down. It will show where your income is coming from, and where your expenses are going to. There are also other important areas you should analyze. For inflow, consider the average revenue per account and customer lifetime value. For outflows, look at the cost of customer acquisition and your churn rate.
- Take a Look at the Bigger Picture – Financial analysis is vital for founders as they want to see positive cash flow. You need to be mindful of external factors which can influence those numbers. A few late payments to suppliers can suggest a better financial status. While one-off costs like purchasing new equipment can make it look like you’re in the red. Consider these carefully and their impact on profitability.
- Be Prepared for Ebbs and Flows – Managing cash flow is not short term and should be thought of as a mid- to the long-term concept. That’s because there will always be ebbs and flows as you establish your business. Consider the increased turnover flows as a result of growth. It’s wise to always keep a cash reserve for these.
- Stay on Top of Things; Never Fall Behind – Consider the possibility of late payments from customers. This could distort your cash flow figures. A startup relies upon timely payments for day-to-day operations. You may need to consider automating payment processing or strengthening your collection process to avoid any negative impacts from late paying customers.
- Develop a Cash Flow Management Plan – The most effective tip to manage cash flow is to develop a realistic cash flow management plan. It will differ depending on individual business needs but it should always include identification of cash flow obstacles. Prepare to build a path to positive cash flow in order to help attract investors.
There are many reasons for the failure of a new business startup. By being aware of those mistakes, you can learn how to avoid them in your business.