5 Ways Startups Can Improve Cash-Flow Management
Although cash is the lifeblood that sustains every business, far too many entrepreneurs don’t have a proper handle on their cash flow. And this is despite the fact that statistics consistently show that running out of money is one of the primary reasons startups fold. Trying to run a business without meticulously managing your cash flow is like fighting a rising tide—sooner or later you’re going to find yourself underwater. Indeed, even businesses that generate healthy revenue can experience a cash crunch—and this is exponentially true during your first years of operation.
To avoid joining the ranks of bankrupt startups, get smart about your cash-flow management by employing these 5 strategies.
1. Get professional help To save money, lots of new business owners try to manage their books on their own—but this is a huge mistake. Managing cash flow is too time consuming, complex, and critical to your company’s survival for you to fit it in with your other responsibilities. Indeed, the very first person you hire should be a professional bookkeeper/financial manager Effective cash-flow management is the foundation upon which all of your company’s financial and tax strategies are built, and it needs to be done properly from the very beginning. To this end, even if you’ve yet to earn any revenue, you should consider paying for a financial manager out of your own pocket. If you need support in finding the right financial manager, we can refer you to the professionals in our area we trust most. And for details about what skills to look for when hiring a financial manager, check out our previous article on what effective bookkeeping looks like.
2. Put systems in place Above all, effective cash-flow management requires sound systems. If your company’s financial systems and processes aren’t set up the right way from the start, even a skilled financial manager isn’t going to magically fix them.
We specialize in supporting startups set up effective financial systems. Allow us to help you put the proper systems in place to manage your cash flow and ensure your company has a rock-solid financial foundation that won’t collapse when the going gets rough.
3. Closely monitor accounts receivable Many startups experience negative cash flow simply because they don’t stay on top of accounts receivable. You must ensure that your customers pay you on time and in full. Accounts receivable that go unpaid for too long or get overlooked are more likely to go uncollected. Your financial manager should keep track of all accounts receivable and include them in monthly financial reports submitted to you. Having these details included in your reports will not only keep you apprised of your operation’s financial health, but also allow us to better help you should you ever need support with collections.
4. Get paid as quickly as possible
One easy way to improve your cash flow and eliminate headaches associated with accounts receivable is to have your customers pay their bills upfront whenever possible. This is especially true if you have customers who consistently fail to pay on time. If full payment upfront isn’t feasible, even requiring partial payment as a deposit will improve cash flow. To encourage quick payment, consider offering discounts for upfront or early payment. At the same time, have a firm policy in place to penalize late payments and clearly spell this policy out in your sales agreements. 5. Maintain a cash reserve Just about every startup will experience revenue shortfalls. And your company’s survival will likely depend on how you handle these shortfalls. To shield your company from the inevitable lean periods and unforeseen emergencies, try to maintain a solid cash reserve—even if it’s just access to a line of credit. Having a reserve to fall back on will not only protect your company’s financial health, it can also save you from the stress and desperation that comes from unexpectedly running out of money. Nothing will kill your team’s morale—and your company’s momentum—more than finding yourself unable to cover payroll. Keep the cash flowing All the vision and passion in the world won’t keep your startup afloat if you fail to properly manage cash flow. That said, you don’t have to be a financial guru to keep your revenue flowing freely—you just need the proper systems and support. And as your Creative Business Lawyer, we can offer you both. Meet with us today, so we can assess your current cash-flow management systems and advise you about additional measures to shore up any weak spots in your company’s financial foundation. Getting a handle on your cash flow will prevent your startup from running out of money and free up your time and energy to focus on the big-picture responsibilities needed to allow your business to not just survive, but truly thrive. This article is a service of Hanson Legal, Creative Business Lawyer®. We offer a wide array of business legal services and can help you make the wisest business choices throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.