5 Tips to Manage Your Startup’s Cash Flow
By: Sam Kawtharani
Perhaps one of the greatest challenges that new entrepreneurs face is dealing with the money acquired by their startup.
If you think that defining costs, setting a budget and raising capital seemed difficult, you might want to think twice before making costly mistakes.
Dealing with money that comes in is serious business.
Despite their business generating revenue, many entrepreneurs do not have a good notion of cash management, impacting the business’ Profit & Loss Statement (P&L) — a financial statement that summarizes the revenues, costs and expenses incurred during a specific period of time — which could lead to bankruptcy.
To improve your operations and be in a better position for future fundraising, here are five cash management tips we find useful for startups:
1. Know when you will break even
Break even is the point at which revenues and expenses are equal. This should be the first financial goal of any startup — balancing expenses with revenue, i.e. the company pays for itself.
A well-structured financial plan helps you achieve the break even point by controlling your expenses.
2. Continuously manage your Cash Flow
As new entrepreneurs, we tend to focus too much on profit, which might seem like the right thing to do, but an experienced entrepreneur knows that all efforts should go into managing a business’ cashflow — the total amount of money being transferred into and out of a business.
While focusing on profit and breaking even might be a good way to motivate yourself and investors, focusing on cash flow ensures a solid business.
When deploying new capital, pay special attention to your cash and runway. Remember, Cash is King!
3. Always have an Emergency Fund
As individuals we are advised to keep an emergency fund for a rainy day — the same applies in the business world. The startup world is unpredictable, and unless you want to throw in the towel early on, always ensure to allocate an emergency or reserve fund for your business.
Experts recommend between three months and a year’s worth of expenses for a business emergency fund. It’s also ideal to have a business credit line that can be tapped for emergencies and to help level out cash flow over time.
An emergency fund gives you more security, decreases stress, and helps you focus on the important thing; growing your business!
An emergency fund is like a survival kit for startups and businesses.
4. Manage your Account Receivables
If you allow your customers to pay you through invoices that get settled between 30–90 days, you are basically providing financing options over that period of time.
Unfortunately, a startup’s account receivables — the outstanding invoices a company has or the money the company is owed from its clients — extend beyond the 30–90 day period when selling to larger enterprise companies. Big companies know that they can defer their payments since David needs to keep Goliath happy.
Manage your receivables carefully. Don’t put yourself in a position where you have to take on expensive debt for working capital because you have outstanding Account Receivables.
Make sure that payment terms are clearly defined to your customers along with the related fees charged on late payments.
5. Leverage Technology
Gone are the days where financial planning required deep knowledge of the financial world. There are several free and paid tools out there to help you manage your startup’s finances — use them! QuickBooks, Wave, Freshbooks, and many others offer startup friendly plans.
The world of new ventures have become more difficult, competition is great and the market does not forgive. In a market where early stage capital is drying up, cash is so important. It will make or break your business. Monitor it closely and spend it wisely.
About the Author: Sam Kawtharani is an experienced FinTech product manager and co-founder of Seedlify, the first Canadian Capital-as-a-Service provider of marketplace revenue based financing for early-stage growth businesses.
We’re hiring! Join our team: seedlify.breezy.hr
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