Before you throw yourself into the world of business, the importance of cash flow management must always be kept in mind. After all, money is the bloodline of every business. Did you know that the reason why most new startup businesses fail is that they ran out of money shortly after the launch of their business?
How and when to raise money is always a critical issue for start-up businesses. This is especially true for managing your start-up capital. Every move you make that involves cash should be prudently processed before being taken into action. Trying to run a business without exercising proper cash flow management will put a large strain on the profitability of your business.
The effects of poor cash management may vary depending on the type of business. One thing is constant though, effective cash flow management leads to profitability. Give your startup business a chance of success by making sure that you are going in the direction of profit.
Follow these tips on how to effectively manage your startup money.
1. Know your break-even point
Your break-even point is the point at which your total expenses is equivalent to total revenue; there is no profit or loss at this point. Knowing when to break even is fundamental in deciding prices, making a business plan, and setting a sales budget.
There are different ways you can calculate your break-even point. One of the easiest ways is to divide fixed costs by the gross profit margin.
Once you understand your break-even point, you will know just how important it is in the profitability of your present product line. The break-even point tells how far sales can deteriorate before you suffer losses, how much you need to sell before making a profit, and how lowering the price can impact on your profits.
Read: 5 Mistakes Every Entrepreneur Must Avoid When Scaling a Business
2. Handle your funds better
You shouldn’t handle the funds for your business. You need an accountant or CFO to handle this task for you. If you can’t afford to have extra help, you may also opt to assign a trusted employee as a cash flow monitor.
There are tons of accounting software that could help in managing cash flow. Look for software like QuickBooks, which provides sales, expenses, and profits tracker and invoice maker, among other things.
3. Observe effective cash flow management
While your goal is to make a profit, focusing heavily on it can only lead to obsession and unrealistic timebound. You need to maintain focus on managing cash flow just as well.
Check your business finances regularly. Keeping tabs on your cash flow to follow up on invoices can prevent things from getting ugly. Aside from that, it is necessary to double-check the accuracy of recurring expenses. Make sure that your services agreements match up to your current payments.
4. Maintain a business cash reserve
It’s best to be prepared for unforeseen financial problems and possible fallbacks. Think about your cash reserve as a personal savings account— it acts as a hedge that could help you get through changes in market demand or pay for unexpected business expenses.
Your cash reserve depends on your cash flow management and your current business life cycle stage. Every business usually goes through four stages: start-up, growth, maturity, and decline. For startup companies, expect that there are little to no cash reserves because your business has yet to profit. Plus, start-up companies generally have higher expenses than those of the later stages. But make sure that you establish one as soon as your business starts to produce enough cash.
Read: Best Accounting Software for Small Businesses (Paid and Free)
5. Move fast on receivables
Here’s another tip in managing cash flow. Collecting receivables is one of the biggest headaches for small businesses. Collect your receivables immediately because the longer receivables go uncollected, the less likely they are to be collected.
Try to limit the usage of net terms that are longer than 15 days. If possible, observe receivables and customer follow-up as soon as you can.
6. Offer discounts to your customers if they pay early
Not only does offering discounts draw more people to your store, but it can also curb your sales target. This tactic comes handy given the seasonal fluctuations in consumerism behavior. Regardless of your forecasts, you will be able to meet your goals when you offer discounts to early paying customers. State their eligibility for discounts through guidelines and make sure that you enforce it strictly.
7. Extend your payables window
For startup businesses, extending your payables can cover your expenses without the need for a line of credit and can provide a bridge of time to collect receivables.
You can extend your payables window by negotiation payment terms. Don’t be shy to discuss pricing as it would help in the increase of your cash flow. Discuss with your long-time suppliers the payment terms or earning discounts.
8. Back-up your files
Make sure that your files and cash flow spreadsheets are backed up to cloud storage like Google Drive, OneDrive, or Dropbox. Backing up your files will make it accessible anywhere so long as you have an internet connection. More importantly, it will keep your data safe from possible local file corruption or data theft.
9. Eliminate unessential costs
Your forecast will give you a strong view of the needful expenses that you need to keep an eye on. Other than the necessary expenses, you need to minimize spending on contingent expenses to your operation. Remember that you are just at the starting point of your business, you can save these expenses for later when you are profitable.
10. Practice smart hiring
Of all people, startup executives should know the importance of quality over quantity. A high skilled worker is far likely to be able to do twice the task, if not thrice the task of a mediocre employee. Choose an employee whom you can see long-term potential and growth. You’ll probably spend a little more in salary when you hire them instead of hiring second-rate employees.
Understanding and executing these proven tips on managing cash flow can prevent your business from future headaches.
Read: Choosing The Right Accounting Software for Your Small Business