It’s no secret that startup businesses and their owners oftentimes face difficult financial challenges. In fact, 8 out of 10 enterprises fail in the first 16 to 18 months due to a financial crisis.
Managing finances is hard, especially when your business isn’t generating a stable income and revenue yet. That being said, establishing and maintaining positive cash flow is the number one issue for startup businesses.
Cash flow represents the money coming into and money leaving your business. In short, your accounts receivable and account payable. If there’s more money coming into your business than going out, it means you have a positive cash flow and vice versa.
But why is cash so important?
The main reason is that cash is money you have available to cover any expenses or investments right away. Simply put, cash is your most liquid asset and without it, your business can easily go bankrupt even if it’s generating positive revenue. Here are a few tips on how to manage cash flow for a startup business.
Try to cut costs
Many startup business owners aren’t careful with how they spend their budget. That means they usually have more expenses than they should. If you want to have more cash on hand, you’ll have to manage your spending better and try to cut costs whenever you can.
For instance, don’t hire employees too soon, and if you have to hire staff make sure you do it smart. Also, don’t rent out an office space if you can do work from home. That way, you won’t have to spend money on rent, utility and maintenance bills.
Furthermore, try to cut your overhead costs. Overhead costs are expenses that are not directly involved in manufacturing or distribution of your products. As an example, overhead costs are rent, maintenance and utility bills as mentioned before, but also telephone bills, taxes, legal fees, accounting fees, advertising costs, insurance and so on.
The better you manage your spending, the more cash you’ll have available.
One of the surest ways to generate enough cash for your business is to seek out outside investment. For example, you can try to secure funding from angel investors or venture capitalists depending on the nature of your business.
You can also opt for one of the crowdfunding endeavors.If you don’t want to go through all that trouble, you can simply try to secure a bank loan.
However, banks can oftentimes deny your loan request if your credit score isn’t favorable, or they might charge you with an extra high interest rate. Perhaps you simply need a loan with more suitable and flexible conditions for your startup business.
In that case, you can try out alternative funding sources, such as applying for startup business loans. That way, you’ll have funding better suited to your needs as well as your cash flow.
Collect your receivables sooner
Many startup businesses offer convenience to customers in terms of payment options. This is a good strategy to gain a favorable reputation early on, but you have to consider you cash flow issues as well. As an example, your customers pay via invoices and your business is generating revenue from sales.
However, if your invoices are due anywhere between 30 to 120 days, it means you have no cash before you collect those payments.
That wouldn’t be so bad if you didn’t have expenses, such as bills, taxes and salaries to cover during that time. In order to improve your cash flow, try to make your receivables due immediately. You can counter the inconvenience by offering discounts in return.
In addition, if you don’t want to rush customers into paying, you can consider invoice factoring instead. Simply put, you sell your invoices to a factoring company for a small fee and get cash instantly, while the company collects payments when they’re due.
Create a cash reserve
Managing a startup business is difficult on its own. Most startup owners neglect the importance of saving for rainy days. If you aren’t able to implement any cash flow strategies for your startup yet, you can still improve the cash on hand by creating a reserve.
A good example is to have an emergency savings account. You can try to set aside a small portion of your profits or place everything you save from cutting costs into your savings account. Make sure you don’t use funds from your reserve unless it’s absolutely necessary and only for emergencies.
After a while, you’ll have a cash reserve saved up that you can use to improve your startup’s cash flow when needed.
Managing your startup business means you’ll have many challenges and obstacles to face. However, one of the most important challenges will be finances and cash flow in particular. That’s why it’s important to focus on your financial status and ensure your business has cash available at all times.