Your goal with your startup is to make money, right? This is why it’s so important to keep money in the bank moving in and out in a healthy manner.
If you want your startup to succeed, you’ll have to manage your cash flow with finesse.
This can be difficult for new business owners especially when it comes to keeping tabs on your burn rate. In fact, not paying enough attention to your cash flow can result in startup failure.
Even if you are profitable, or you’ve raised a lot of capital, things can sneak up on you like operating expenses.
Five cash flow management best practices for startups
To help you take good care of your cash flow, here are five cash flow management best practices for startups.
#1: Build a cash reserve
This is one of the most important things you can provide your company. Much like the safety net of a savings account for your personal life, a cash reserve can help you take care of your startup in case of an emergency.
Bottom line – your cash reserves are vital to your startup’s sustainability. They’re what keeps your business going through slow times.
So, how much money should you keep in your cash reserves? This number depends on your burn rate as well as the type of your business, how long your startup has been in action and the nature of your sales cycle.
At the very least, you want enough cash reserve to get you through one month. Four-six months reserve is a best practice.
Your burn rate is directly equal to how much money you spend in a month, so this should help you with a dollar amount.
#2: Don’t let it slide
This means that if people owe you money, you expect them to pay it.
You’ll find that in business, if you set a good precedent, it’s easier to stick to it.
For example, if you’re a startup that offers services to people such as marketing or graphic design, and you send monthly invoices, you want to provide strict payment terms.
Tell your customers you won’t continue to work for them if they don’t pay you.
If you’re selling products either business to business or business to consumer, try to get payment at the time of sale. If this isn’t an option, don’t go any farther out than net-30. One month is a long time to wait to get paid, especially in the early days of your startup.
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#3: Offer payment discounts
One way of increasing your cash flow is by offering your customers discounts for early payments.
While this might ding your profit margin, it will help you get more money in the bank and manage your cash flow better.
In addition, consider asking your suppliers for an early payment discount as well. Even though your cash flow takes a hit when you make a payment, you’ll keep more of your money with a discount.
#4: Mark your break-even point
Do you know who much you need to sell to operate in the black? Do you know the number that makes your startup profitable?
These are both good things to know because then you’ll have real knowledge of not only how much you need to sell, but you’ll know the safe burn rate for your business.
Always keep tight control of your expenses so you can manage your goals and sales projections.
#5: Outsource your accounting
The final, and one of the most important ways, to take care of your cash flow management is to outsource your accounting to a reputable company.
You are quite busy running your business and keeping the big picture in front of your team. So, when you leave the accounting to the experts, you ensure it’s taken care of correctly.
Your outsourced team can make sure your bills are getting paid on time and let you know when they foresee trouble.
Having someone help you with your finances and manage your cash flow can be just the thing your startup needs.
Final thoughts
It’s never too early to start thinking about your cash flow as well as your financial practices. Make sure you have a team onboard from the beginning to help you with your cash flow management.
When you have some help, you also eliminate the stress that goes along with financial accounting. By getting rid of this stress, you can concentrate on marketing your business, creating new products and services, managing your team and obtaining more investors.
Finally, as your business grows, continue to watch your finances carefully. As you scale, you need more staff and more resources.
It can be tempting to think all is going well if you’re growing rapidly, but you want to continue to monitor cash flow and burn rate because high periods of growth can be tricky when it comes to cash flow management.
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Since 2006, Escalon has enabled thousands of businesses to have a proactive approach to managing finances with our back-office solutions for accounting, HR, payroll, insurance, and recruiting — and we can help yours too.
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