For a startup to survive and succeed, it needs to manage cash flow with utmost care and skill. Founders and business owners often find it challenging to maintain a steady handle on their burn rate, and this has become a common reason for many startup failures.
Even if you’ve reached profitability or raised a significant amount of capital, you can still fall short if you don’t manage to meet your overhead, payroll, and other operating expenses that keep your business afloat.
Here are a few tips to ensure you maintain a positive cash flow at your company.
1. Build a highly productive team
A lot of startups make the mistake of hiring a less experienced workforce in an effort to save money. But, it doesn’t work that way. Their skill level may force you to spend more resources and time on onboarding and training than you can afford. Right off the bat, this becomes a barrier to your ability to focus on revenue generating activities (producing/shipping your product, coding your app, managing clients, and providing customer service). Instead of increasing your cash flow, greener hires increase your burn rate, shortening your cash runway in the process.
That increased overhead is why it’s best to hire the highest quality candidates. Yes, you might spend more on their salary, but they will start delivering early and are less prone to errors (another costly downside to inexperience). Along with that, you should also invest in tools that help with productivity, communication, and email management to help your team get things done faster—even better if you can streamline as many functions as possible into one or a handful of tools.
2. Be strict about receivables
Most startups are on cash-basis accounting which means getting your customers to pay up front or almost immediately will make it easier to manage your expenses and overheads (more on the cash method of accounting here). Because of the way companies recognize their reveue on the cash method, the longer you wait for receivables, the less cash you’ll have on hand to use on or plan for daily expenses.
To encourage timely or early payments, you can offer discounts or ask for advances or deposits for long-term projects. If you take credit payments, have a written policy in place determining who is eligible for credit and who is not. You also need to regularly track and update the status of your receivables and send reminders when required. The key here is to be flexible and transparent—but consistent—so you can build your customer’s trust.
Quick tip: Try multiple payments options if your product and industry allow. Analyzing your customer feedback is a great way to find out how happy they are with the available payment options and how you could improve.
3. Breakeven point as a benchmark
Most startups aren’t profitable, especially not at first, but setting your breakeven point as the end-goal will make cash management a lot easier. Knowing what it takes to get your company in the black—or profitable—gives you clarity about how much cash you can burn.
This practice will help you keep a tight leash on your expenses and simplify your goals and forecasting. It may also force you to be a little more innovative, as you will have to come up with cost-effective ideas for business expansion.
4. Keep a watchful eye on expenses
You need to be careful when it comes to handling expenses, especially if sales are low. Inaccurate estimations or expenditures can quickly lead to a sudden cash shortage.
The key here is to find out your burn rate, then set your budget accordingly and make sure that you stick to it.
Review your burn rate regularly in case you see deviations and find ways to cut back, so it doesn’t become a burden. You could also invest in tools like inDinero to outsource your company’s cash management function. With inDinero you can review your burn rate, cash runway, revenue vs. spending, and cash balance at a glance from your dashboard. (Watch our demo to see for yourself.)
5. Maintain some cash reserves
Cash reserves are critical to ensuring sustainability—it helps your startup stay upright and get through unforeseen emergencies. Negative cash flow can make it difficult for you to pay employee salaries, bills for utility services, and interest as well as cover other bank charges. Missing these payments can damage to your business in the long run, so, it is better to stay prepared.
The amount of cash to keep on reserve depends on your burn rate, nature of your business, stage of business, and the length of your sales cycle. At the very least, you should have enough cash saved to deal with one additional month’s operating expenses. But remember, having too much saved isn’t ideal either, as idle cash earns no returns.
6. Communicate the goals to everyone
It’s important to ensure every member of your team has a clear idea about the company’s financial goals. Use budgets, quarterly plans, annual plans, and three-to-five-year plans to communicate this company-wide. It will help your teammates make decisions that are in alignment with the company’s overall goals and objectives.
7. Maintain a tight focus
As Matt Wilson says “Start with capital, pick a way to make money, and stick with it.” Many startups fail because they try to do too many things at once, especially at the beginning.
While many emphasize the qualitative effects of spreading yourself too thin, what’s even more critical is that this overexertion will lead to unnecessary expenses that may not generate any revenue immediately, or at all. Chasing multiple ideas is a surefire way to rip a massive hole in your cash flow.
Instead, take each initiative one step at a time, and only invest major funds in areas where you can’t afford not to spend.
8. Make better use of all your assets
Many companies find it difficult to shed their idle assets, but the more you hold onto your materials or equipment, the more expensive it gets. Think about all the costs you’re forced to pay such as rent, service and maintenance charges all without actually generating any income. On top of all that, you have to consider depreciation as well.
So, look for assets that you aren’t using to their full potential. This could be anything from an empty room to an unused laptop. Disposing or renting out assets that are just taking up space can help improve your cash flow. Additionally, it will offset the undercover costs of owning that particular asset.
Good Cash Flow Habits Will Help Your Startup Stay Afloat
Good cash flow management habits may take a little additional effort and time upfront, but in time it will bring stability. Running your business will seem less stressful. You will be able to focus and dedicate more time to product development and sales.
It’s never too early to start thinking about your cash flow and other accounting practices. With the unpredictable nature of startups, you may want to plan for multiple revenue and growth scenarios. If you don’t already have an accountant or CPA, you can start building out your revenue model using this fillable template.