Launching a startup is not an easy feat, and many entrepreneurs who go it alone find they may not have the necessary experience when it comes to running other areas of the company, such as small business cash flow.
4 in 10 startups will fail within their first 5 years of operation, and one of the most significant contributors to the high failure rate is an inability to manage small business cash flow. It's exciting to get the ball rolling and see your ideas take shape, but it can be easy to lose focus on your financial stability during those first critical months.
In this article, we will talk about what is cash flow management for startups and provide 6 cash flow management tips SME owners can apply to their business.
What is Cash Flow Management for Startups?
Cash flow management refers to the processes a business uses to monitor the cash coming into a business, the money flowing out, and optimizing it so the amount of money coming in is always more than the amount going out.
Carefully monitoring cash flow management for startups will enable SMEs to analyze and take advantage of market trends, ensure there is enough cash surplus to pay monthly expenses and know if and when a shortfall is imminent.
Cash Flow Challenges for Startups
Startups are unique in many of their challenges, with one of the major hurdles being cash flow management. Being aware of the cash flow challenges can be a big help in navigating through the obstacles.
Here are just a few of the challenges you may face as a startup.
Understanding the Source of Your Finance
Understanding where your cash is coming from is a big step towards effective cash flow management, as well as where it's flowing out.
Entrepreneurs can get caught up with growing their business and can fall into the habit of neglecting their cash flow statements. These are critical to understanding the ebb and flow of money. Key areas to focus on for inflows are the average revenue per account and customer lifetime value. For outflows, you should be looking at the churn rate and the cost of customer acquisition.
Investor Money is Finite
Those first few injections of cash from investors are exciting, and it's easy to lose sight of the long-term goals. However, it's critical to keep in mind that investors will be seeking a return, and investment cash injections will soon dry up.
Overestimating Future Growth
You know you've got a great idea, but it's not about you, it's about your customers and their needs and wants. No matter how excited you are for your idea, it won't have any bearing on how the market will respond. Don't rely on hunches about your future growth. In-depth market research is the only way to ensure your timelines for expansion are realistic.
It's rare for a supplier to offer small startups a credit account. Most suppliers will require up-front payments in the beginning or at least a significant portion of the outstanding amount. If you have set yourself up to be reliant on a credit system, it can hamper your cash flow to the point of shutting your doors.
6 Startup Cash Flow Management Tips
Too many startups with great ideas have folded because of the small business cash flow challenges they weren't prepared for or didn't understand. Soon, enough reality comes calling, and they realize there is no more cash surplus for paying the rent, or investment funds have dried up without the customer base needed to support the business.
If your cash outflow is greater than your cash inflow, then the business is under threat.
Here are 6 strategies you can use to ensure your startup makes more than it spends.
1. Control Your Spending
All businesses exist to make a profit, but few do in the first few months. Most will rely on raised capital to carry them through the teething stage. Use a spreadsheet to track your spending manually but start looking into software that can automate this process for you. Spreadsheets are time-consuming, and your data is not secure.
Quality spend control software removes human error as well as adds a decent level of cybersecurity to your system. Tracking finances should be a daily task. Once a month or once a week won't give you enough notice about any issues that may have developed while you were busy elsewhere.
2. Regularly Inject Funds into A Rainy-Day Account
Start building your cash reserves from day one. You can plan for the future, but you never know for sure what's around the corner. The current pandemic of 2020 is a testament to the fact that anything can happen and usually does. A tidy sum kept in reserve will help keep you calm, thinking straight, and give you time to pivot in uncertain times.
3. Building Trust with Your Customers
Try to develop customer-friendly policies from the beginning so you can get your customers relations off to a good start. Always strive to create the best customer experience you can. Ultimately, it's the customers who will be keeping your doors open. It can be tough at first, but the more you learn about your customers, the better you will be able to respond to their needs.
4. Get Some Help with Money Management
Money management is not a frivolous task, nor can it be something you will get to you when you find some spare time. You likely won’t and will end up spending the bare minimum of time managing your finances.
It won't be enough. Most entrepreneurs will find that money management can take up to 80% of their time, which doesn't leave much left for managing, marketing, and growing the business.
You will need some help to manage your cash flow. You don't have to resort to hiring full-time staff, as outsourcing is an excellent strategy for adding professionals to your team on an as-needed basis.
5. Stay on Top of Receivables
When you are doing the right thing and paying your bills on time, you should expect the same from your clients. Unpaid invoices have sounded the death knell for many startups. Get your late payment policies in place from day one and be proactive in chasing up the late payments. There are always a few clients who will take advantage, but if they know they will hear from you as soon as the invoice is overdue, they are more likely to make your payment a priority.
6. Automate Your Cash Collection
Paying your invoices and getting paid on time are vital strategies that will improve your cash flow. Automating the flow of money through a cashless payment system provides significant advantages.
For one, you won't be spending a good portion of your day chasing up late payments, nor will you forget to keep payments to your suppliers up to date. Not having to enter expenses manually from a paper-based system will also free up more time for running and growing your business.
Using technology for automating cash flow management for startups also delivers the ability to monitor cash flow from wherever you are at any time. Plus, when your business goes global, managing payments in foreign currencies will be more straightforward.
Every successful business starts with a great idea, but that is no guarantee for success. Even the best ideas can fall flat and go broke if you don't get a handle on your small business cash flow from the beginning. Cash flow management for startups means closely monitoring your cash levels so you can plan your growth. Using strategies like providing excellent customer service, implementing payment policies from the beginning, and developing automated payment solutions will also play essential roles in your cash flow management.
Alibaba.com is committed to helping small and medium-sized businesses thrive with helpful resources designed specifically for those looking to start and grow your wholesaling, manufacturing and import-export businesses. Speak with an expert now to get advice.
Further reading for SME beginners: