Initially, running a startup or small business can feel exhilarating. Yet, amidst all the excitement, it can be easy to overlook mundane things, like managing your cash flow.
Read on to learn about the importance of cash flow management and how mastering it can help your business not just survive but truly thrive.
Cash Flow Management: From surviving to thriving
The first few years of running a startup or small business can feel exhilarating. And amidst all the excitement, too many overlook or let slip the more mundane work of managing cash flow. But cash is the lifeblood of your business, and it's crucial to keep it flowing steadily.
After all, it's what keeps your operations running smoothly, your bills paid, and your dreams alive. Without a handle on your cash flow, you risk running into financial roadblocks that can derail even the most promising ventures.
Indeed, too many business have failed because of cash flow management problems. Don’t let yours be one of them.
Check out these tips for mastering this vital business discipline. And remember, managing your cash flow isn't just about survival; it's also about thriving and seizing opportunities. Embrace the challenge, and pave your way to long-term success.
Plan for the Worst, Hope for the Best
Starting a business is fundamentally optimistic. It takes belief in yourself, faith in your vision, and conviction that you can achieve good outcomes. But sometimes you have to be a pessimist, even as you hope for the best, to manage a startup effectively.
By anticipating potential challenges and having a contingency plan in place, you can safeguard your business's financial stability.
Start by analyzing your historical data and identifying any patterns or trends that could influence your cash flow. Think about seasonality, market fluctuations, and customer behavior.
Then, as we discuss below, you can build a buffer by setting aside reserves or exploring financing options to bridge any potential gaps.
Remember: Profit Is Not Cash Flow
Too many startups confuse profit with cash flow.
It’s a common misconception, and indeed it seems intuitive to look at profit as cash on hand. But it’s possible to be making a profit and suddenly, nevertheless, finding yourself scrambling to cover payroll.
Profit is revenue minus expenses, and accounting rules let us book revenue when we send an invoice. But while that money is there on the balance sheet, the cash has yet to be collected.
Accounts receivable is one of the key factors that takes effective cash flow management outside your P&L statement. Others include inventory, CAPEX, and debt service.
To keep your cash flow healthy, keep a vigilant eye on your accounts receivable, negotiate favorable terms with your suppliers, and consider financing options to bridge any cash gaps.
Keep a Reserve
Cash is king in the world of startups, and when it comes to managing cash flow, a cash reserve is your best friend.
That's because every day brings a fresh set of challenges - unexpected expenses, late payments from clients, or even, as we’ve seen recently, a global pandemic. These bumps on the road can throw your cash flow off balance.
But, With a robust reserve, however, you've got the cushion to bounce back without jeopardizing your operations.
Think of your cash reserve as an investment in your peace of mind—and in your business’s future. It's not just about survival; it's also about having the confidence and freedom to make brave decisions and take calculated risks that could propel your business forward.
Keep that cash reserve healthy, and watch your business thrive.
Do What You Can to Get Paid Faster
You may be so happy to have your customers that you hesitate to lean on them to pay their bills on time. But this can create serious cash flow problems.
While you can book revenue on the invoice and even show a profit, it's important to remember that profit is not the same as cash. Additionally, you still need to take care of your own invoices and payroll.
If you can’t get payment up front, make your invoices due immediately. Tip: Consider offering discounts for early payments. While your profits might take a small hit, your cash flow will be more reliable
Get the Right Tech
Spreadsheets can only take you so far when it comes to managing cash flow.
With the right software, you're not just tracking money, you're mastering it. Real-time insights? Check. Predictive analysis? Absolutely. You can see where your cash is going, pinpoint any leaks, and act quickly.
What’s more, as cybercrime becomes more and more prevalent, keeping your data secure is more important than ever. Be sure to choose solutions that protect you and your customers.
Finally, having solid financial technology in place will make you more agile as you grow—the earlier you take action on this one, the fewer headaches you’ll face.
Get Help
Hire a good accountant or Chief Financial Officer. You might take justified pride in your ability to manage money, but as a founder you have too much on your plate to take on yet another full-time job.
Think about it: You wouldn't go on a road trip without a map. So why navigate the complex financial landscape of your business without a guide?
Your accountant isn't just a number cruncher, they're your strategic advisor. They'll help you understand your cash flow inside and out, predict financial peaks and troughs, and ensure that you're not just surviving, but thriving.
And it's not just about the money. It's about freeing up your time so you can focus on what you do best – growing your business.
Focus on your Business Priorities
Don’t fall prey to popular fantasies of spendthrift startup culture. Free massages and Friday kegs might be part of business lore, but they don’t always make business sense. Make sure your spending is focused on growing your business. Keep a budget and be vigilant about watching for opportunities to reduce costs.
Tip: When you take on new work, make sure you have available cash flow to deliver on your promise to the customer. If it’s a big client involving substantial investment, consider offering a discount for an extended deadline so you don’t dip into the red.
Now, over to you…
Have you discovered innovative cash flow management strategies at your small business? If so, what benefits have you seen – to your business and your customers?
To help other small businesses discover the benefits of embarking on a continued learning journey, share your experiences and thoughts below.
Rick has worked in B2B publishing and communications for more than 25 years, focusing on technology for the past decade.
Whether explaining complex regulatory regimes or the real-world implications of tech innovations, he enjoys the puzzle of distilling challenging material into simple, instructive prose.