Establishing and maintaining strong cash flow is integral to long-term success for any startup. Accurate bookkeeping and building good relationships with clients, lenders and suppliers will aid this goal.
Positive cash flow demonstrates that a company is earning more revenue than it’s spending, which can boost investor trust and confidence in the firm. Conversely, negative cash flow can impede operations and make meeting day-to-day operational expenses difficult.
1. Develop a strong budget
Budgeting is an invaluable asset to managing cash flow for startups. It allows founders to set goals for their business while showing investors that the startup has a plan in place for its expansion.
Budget for startups must include all major expenses, from fixed expenses such as rent, utilities and payroll to variable ones like sales and marketing costs. Updates should be made regularly according to actual performance of your business.
Entrepreneurs should always use conservative estimates when forecasting sales and expenses. Furthermore, they should remain realistic about when increased sales will lead to cash inflows – this will prevent creditors from becoming unsettled with them, and/or prevent running out of money to cover operational costs.
2. Establish a cash reserve
Cash reserves can provide an emergency fund against unexpected expenses or decline in revenue, and can even serve as a tool for financing acquisitions or time-sensitive investments.
Reserve some of your startup’s fixed expenses such as payroll and rent to start saving for its future growth, like payroll and rent payments. Or use short-term investments that can easily convert to cash such as money market funds or certificates of deposit.
Ideal savings goals should include three to six months’ worth of operating expenses being saved in an emergency reserve fund at all times. If necessary, develop guidelines for when it is acceptable to draw on reserves, with plans in place for replenishing them as soon as possible so as not to use your reserves for irrelevant reasons and maintain a steady level of liquidity.
3. Maintain a tight control over expenses
Reducing expenses is essential to any successful business, and startups have many ways to do it. One such method is using budgeting and financial planning tools to develop realistic budgets and forecasts.
Benchmarking against industry norms is another effective strategy to discover potential cost reduction or savings opportunities. Finally, keeping track of all expenses as they occur requires using automated expense management systems with real-time validation and rolling views of company purchases.
Finally, optimizing cash inflows and outflows by implementing efficient invoicing processes and negotiating favorable payment terms with suppliers can help balance out cash inflows with outflows to maintain positive cash balances and avoid cash flow gaps.
4. Avoid over-expansion
Care must be taken when expanding a startup’s business; rapid expansion could potentially drain cash before new revenue can come in.
Cash flow management aims to achieve positive cash flow for a business, enabling it to save more than it spends, acting as a cushion against financial setbacks and supporting sustainable growth. Some best practices for cash flow management include creating a budget and forecast, using accounting software to optimize accounts payable/receivable processes, engaging in proactive debt management practices, regularly reviewing cash flow strategies and adjusting strategies as needed – startups that adopt these practices may benefit from increased profitability, reduced fraud risk and smoother financial operations.
5. Set aside a portion of your revenue for taxes
Cash management for startups can be challenging, yet taking an active approach to managing cashflow will ensure your startup remains financially sound and ready for growth.
Consider cutting unnecessary expenses, like software subscriptions that you aren’t using or overpaying for office space. Negotiate better payment terms or use credit cards which permit postponed payments as another means of saving.
Set aside a portion of your revenue for taxes. Achieve this by opening a separate savings account and depositing 15-30% of every payment into it without touching it – or work with an accounting expert to make sure your savings will cover quarterly tax bills.
