Every new startup needs to understand that one of the main reasons businesses have to shut down shortly after launch is because they run out of money; this is a proven statistic. However, even startups can easily avoid becoming failures by following some smart practices and knowing how to channel their startup capital.
Most first-time business owners begin thinking about cash flow only after they find themselves scraping the bottom of their cash reserves. However, cash is king, and learning how to manage your cash flow is one of the most important aspects of running a business.
Most business owners realise that the problem isn’t about not getting paid. It’s more about when that cash flow comes in. Handling an erratic cash flow can be a stressful experience for any business because it can mean missed billed payments, delayed paychecks to their employees, or stagnation in growth as they are unable to take on any new clients.
The good news is that business owners can easily take a few steps to avoid putting themselves in a position where they are at the mercy of their clients and the payment schedule they follow.
Cash Flow Management Tips
Maintaining the profitability and sustainability of your business is a lot about making sure that you are walking down the right path when it comes to cash flow management. Here are some useful tips for a new business to manage their cash flow:
1. Being Proactive Helps
As a business owner, your time is one of your most valuable resources. It is better spent managing and growing your business rather than fixing various cash flow crises that crop up along the way. It can be tough to spend time on essential business operations when you find yourself continually matching incoming checks with outgoing payments.
Having a sufficient amount of working capital at all times to ensure a good cash flow whether as a funding source or cash reserve will give you the cushion you need to focus on other important aspects of your business and have peace of mind.
Whether you are a business with just a couple of employees or hundreds of them, it is better for your profitability to spend time dealing with various aspects of the frontlines of your business rather than the administrative tasks and back-office jobs.
2. Be Well-Prepared
If you have a good source of funding in place, it can help your business grow at a steady pace since you would not have to turn down new accounts. When you are prepared, you are also able to negotiate and deal with people from a position of strength.
If you are shopping during crises, you can become easy prey for unscrupulous financiers. Various short-term lenders offer long-term contracts and confusing terms with hidden fees to lure in the clients that do not have sufficient time to conduct research. These unseen charges significantly increased the actual costs of acquiring financing.
Also when you are locked into long-term contracts, it means that your requirement for any short term cash transforms into a much more long-term drag on your business, to meet the financing minimums. It is essential not to go looking for cash flow solutions when you are very vulnerable.
3. Be Aware Of When You Will Break Even
Being aware at which point you will break even will not effectively impact your cash flow. However, it will give you a ready-made target and goals that you can strive for. You can also forecast where your cash should be directed to reach a specific goal. Focusing on this and all the milestones that you have to reach, to break even. It will give you a better way of spending your startup capital at different stages, and you will also be able to budget accordingly.
4. Never De-Focus From Cash Flow Management
You must avoid focusing excessively on profit. While this might seem like a contradiction of sorts in comparison to the first point, that isn’t the case. You must look at your profit as well as your break-even point when you are setting any benchmark. However, you would still have to focus on your spend and cash flow simultaneously. That does not change in any way, even when you become a profitable business.
A successful entrepreneur will be very mindful of what the condition of their cash flow is. Rather than doing these checks every month, if you keep track of your business and personal finances each week, you will have a better understanding and control of the situation.
5. Always Have Some Cash Reserves
As a startup, you need to be prepared for shortfalls. This can happen to just about anyone, even those who have excellent plans in place. However, your survival will depend on how you navigate those shortfalls. During lean times, it is this cash reserve that will lessen the blow, distractions and stress which will permit you to stay focused on running and growing your business successfully.
6. Manage Your Business Funds Better
It is never a good idea to handle your business cash flow and money matters yourself. This includes handling your accounting and tracking the money. Always hire either a CFO for an accountant to manage this task for you. In case you are unable to get that additional help, delegate the job of cash-flow monitoring to a trusted staff member.
Consider using a proven and time-tested service and software platform that has accounting software. It will help to ease the process of cash management. When you have tax specialists and accountants working diligently on this aspect of your business, it helps your company to grow in a better way. Tax specialist access is crucial for cash flow as they can ensure that you stay on track with filing business tax returns and maintaining the deadlines so that you can avoid interest and penalties.
7. Collect All Your Receivables Immediately
It is vital to make your invoices “due immediately “. Also, reduce the use of net terms which are beyond 15 days. If you can do this, dedicate the job of keeping an eye on customer follow-up and receivables so that you can get the money as soon as possible.
8. Offer Some Discounts So You Can Collect Payments Earlier
If you feel that you do not want to wait for the pay-out as per normal net terms, you can offer your customers some discounts when they make their payments early. If you have some employees dealing with collections, make sure some guidelines state the eligibility for discounts and enforce those standards stringently.
9. Extend the Payables Wherever Possible
Whenever you are aiming to bring in all your payments as quickly as possible, work closely with your vendors and suppliers to attract the best deals and extend the payables as much as you can.
10. Restrict Spending To Essentials
When you have a good forecasting model in place, it will give you a better view of all the essential expenses you have to incur. Outside these crucial purchases, it is necessary to reduce costs and minimise spending that isn’t necessary to your operation until you attain profitability.
11. Hire Smartly
While many experts in the field will tell you not to hire until you need to, it is far better to be smart with your hiring processes. If you can recruit talented people, these are highly skilled workers who would be able to handle the job of more than one mediocre employee. It means you will spend more on benefits and salary to attract the top talent. However that amount will still be far less than what you would spend on hiring multiple employees who make frequent mistakes while covering a particular task. Look for people who have the mettle, experience and drive to work alongside you to keep your business on the path of success.
In addition to all of these things, focus on using new technologies such as cloud storage. Always consider the return on investment of financing and not just the costs alone. Try to secure funding well before you need it as it will allow you to grow your business at your pace.
How to Gear Your Business for Growth
If you try to operate your business without focusing on managing your cash flow carefully, it would be like attempting to row upstream without any oars. You would not be able to reach your destination. Even if you do, you would not have the strength to move forward from that point on.
Managing your cash flow well is a lot about ensuring that you pay constant attention to your spending and the receivables. As long as you keep control of the former and maintain the pace of the latter, you would be able to build a sustainable business that is also geared for growth.
For more information about how to manage your cash flow, contact the experts at Benchmark Cost Solutions at this number – 02 9525 0777. If you prefer, you can also request a call-back or write to us at this email address, and we will revert quickly.
Thanks for reading,
Benchmark Cost Solutions Team
02 9525 0777