Cash flow can be a major issue for entrepreneurs. Not all startup founders really understand finance and this can prove problematic. Without proper planning, a new company can find its financial resources depleted leaving it high and dry during downtimes.
As an entrepreneur, you soon realize that you don’t only have a responsibility to yourself but also to a lot of other people – staff, investors, and customers alike. A lack of fiscal responsibility when it comes to managing your cash flow can be the single most damaging reason why your business fails and impacts the lives of many other people.
Good cash-flow management is imperative. It requires an awareness of every inflow and outflow of cash, together with a general knowledge of intelligent cash-flow strategies. Being vigilant and knowing how to respond to avoidable surprises and unanticipated expenses, is key.
And this is essential regardless of which stage your startup is moving through. From the initial foundation through to approaching an investor, and far, far beyond.
Startup cash flow strategies
So what are some intelligent cash flow strategies you need to consider as a startup founder?
Here are five:
- Charge customers as soon as possible
The sooner your customers or clients pay, the smoother your cash flow. Late payments can wreak havoc on your finances, which in turn negatively impacts on your staff, productions, marketing, and even utilities. You also waste precious energy which should instead be focused on growing your company.
Make sure customers pay quickly by using techniques such as expanding payment options, sending invoices immediately, asking for upfront payments, automating payment procedures, and setting shorter invoice payment due dates. You can even offer small payment discounts for faster billing.
- Create an emergency liquid asset reserve
A liquid asset is something that can be converted into cash in a short period of time without losing market value. An emergency liquid asset reserve can be a life preserver for an entrepreneurial startup facing an unexpected crisis and cash flow problem.
It can also be beneficial when you need to invest in taking your start-up to the next level, such as hiring extra staff and product expansions, without the need to raise capital. Without a liquid asset reserve, you might suddenly find your company’s coffers empty, and that usually spells the end of your dream.
- Take a salary hit when bootstrapping
Bootstrapping is growing your startup business with no (or very little) outside investment or venture capital. The name originates from the 19th Century expression “pull yourself up by your bootstraps” and is often used as a badge of honor for entrepreneurs who make their business strategy work with little outside funding.
To bootstrap successfully, you often need to take the lean approach when giving yourself a salary. Profits are instead reinvested in the fledgling startup for maximum growth. This can be especially important if outside funds are hard to come by and savings are depleting.
- Set up a line of credit
A business line of credit (LOC) is used by startups facing cash flow difficulties or who are concerned about unexpected expenses. Similar to a loan, an LOC differs in that you have access to a set amount of cash only when you need it. You start paying interest only when you borrow, and also get to borrow more funds again after repaying a draw.
There’s a lot more flexibility with a line of credit, which is often an attractive alternative for startups. It can be a lifesaver when the unexpected happens, which it often does in business. However, it’s imperative you have good financial acumen, after all, a LOC is still a debt that has to be repaid.
- Use the right software
Successful startups invest in the best software from Day One. Growing and running a strong business requires the utilization of the best software, tools, and platforms. From project management, customer service, and spend-tracking software to cloud invoicing, app integration, and data security software, there’s a whole panorama of great tools to speed up a startup’s workflow and cash flow.
At Invoice Ninja, for example, our invoicing software allows for growing businesses to manage their projects, time, invoicing, and payments, all from one central and easy-to-use dashboard. Plus, a whole lot more, including full integration and synchronization of data across thousands of different apps.
Managing your cash flow for ultimate success
A failed startup is heartbreaking for hardworking founders. It signals the end of so much effort and labor, and above all, a failed dream. Startups fail for many reasons including a lack of market demand, a poor product, co-founder friction, bad management, and inconsistent marketing.
But according to research, running out of money (or a flawed cash flow) is one of the main reasons.
When starting a business, it’s essential to study finance and cash flow management. It’s the engine of your business. Savvy cash flow strategies, especially when things are tough, can mean the difference between a business that flops and a business that goes on to make millions.