How to Overcome and Prevent Cash Flow Management Problems at Your Start-up
It should come as no surprise that running out of money is one of the top reasons why new businesses fail.
Keeping money in the bank can be a pivotal challenge for a new business. If you aren’t strategic with your cash flow, then it is like you are trying to row a boat without an oar. Not only is it stressful to manage a company without cash in the bank, but a lack of capital will obviously affect your ability to pay for ongoing basic expenses, payroll, and inventory.
Furiously looking for more sources of revenue isn’t always the answer to cash flow issues. In fact, ideally, it should never even come to that level of desperation. The first place to start should be finding out how to work with what you have.
5 Best Practices for Managing Your Start-Up’s Cash Flow at Any Stage of Growth
Whether you are preparing to launch a start-up or you are working to grow your business, the following pointers will help teach you how to manage your cash flow:
- Identify Your Break-Even Point
How much money do you need to bring in each month to cover the essential costs? Add up recurring expenses, such as rent, utilities, payroll, and other predictable business costs. Then, build your business goals around milestones that will increase the likelihood that you will have enough in the bank to pay these costs.
- Review Income, Scrutinize Expenses
If you are running into cash flow problems, then the most common response is to look for ways to earn more money. But, don’t overlook the importance of evaluating your outflow as well. Review ongoing expenses in detail to identify “extras” that can be eliminated. You might be surprised to see how easy it is to cut down the monthly overhead costs.
- Don’t Let Receivables Slip
Stay on top of invoicing and payments from customers. It is essential that your clients and customers pay on time as the incoming cash is critical for your ability to cover your costs to deliver your product or service (aka your COGS) as well as your overhead costs. Specify payment policies to eliminate long payment timelines that delay receivables. Consider assigning an employee to keep an eye on receivables and customer management to ensure timely payments from customers.
- Have an Emergency Savings Account
If you’re just starting out, it can be impossible to know when business might slow down, and even as the years go on, this can be challenging for companies of any size. Seasonality can mean getting caught in a sticky situation if you don’t have money set aside to cover the current bills. Create a savings account that is dedicated for emergency situations. Shortfalls will happen in your company, even if you have an effective plan in place.
- Don’t Do It Alone
Most entrepreneurs and business owners don’t have the time or years of expertise in formal accounting or finance to manage their entire financial picture after their very first sale. So, it is common for mistakes to be made in the way the books are handled. And if a mistake you have made in your books flies under the radar, it will certainly bleed into your taxes at the end of the year. If you want to reduce spending and optimize long-term results, then hiring an outsourced CFO or accountant can be one of the best decisions for your company. Not only will a CFO have the foresight and experience to help you reach virtually any of your business goals, but they can also assist with tax strategy and systems to improve cash flow in the immediate future.
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