It doesn’t matter how amazing your business model is, how profitable your venture seems to be or how many investors are lining up to support your startup – you can’t survive (let alone thrive) if your startup runs out of money. As a matter of fact, a study from the financial services enterprise US Bank discovered that as many as 82% of startups and small companies fail because of poor cash-flow management.
So, even if you’re an excellent entrepreneur in every other business aspect, you have to remain squarely focused on managing your startup’s cash-flow in order to avoid placing your company in imminent danger. Here are five of the common tips that can help you with this:
Include financial expenses and projections into your business plan
The business plan for your startup needs to be financially feasible. As a new company, one of the most noteworthy restrictions you will encounter is cash-flow and funding. Imagine you have a perfect business plan. You’ve assessed your startup’s and client’s needs. You’ve devised the right marketing strategy for raising awareness of the product or service. However, without the money to implement any of it, this plan won’t be of any use.
Hence, you need to determine financial restraints along the way. For example, by projecting the expenses of marketing, labor, distribution, production, sales, etc. In other words, viewing if your plan is feasible for your startup. This isn’t about including a full audit report in your plan, but rather constructing a summary of the projections.
Don’t engage in impulse spending
While it does “take money to make money”, this adage makes many rookie entrepreneurs grossly overspend, especially in the beginnings of their business ventures. The reality is that this saying is true, but not all startup costs are created equal. Starting a company involves a lot of clearly beneficial costs – ones that can benefit your startup’s profitability in measurable ways. And yet, there are also plenty of advisors, consultants and B2B service providers who would be happy to take your capital for stuff you don’t actually need.
If you want your startup to make cash, then, focus on the bottom line, determining the cost-benefit of every single expense. After all, every buck you spend on your startup is a dollar that is ultimately removed from your profit margin. Besides this, develop a realistic budget, and stick to it.
Use invoice finance
Invoice financing, or “accounts receivable financing”, is a way for companies to borrow cash against the amounts due from clients. If a business sells services or goods to big customers, such as retailers or wholesalers, it often does so on credit. This means that the client doesn’t need to pay immediately for the goods that it bought. The purchasing business is given an invoice that has the total amount due and the bill’s due date.
Unfortunately, offering credit to clients can tie up funding that your startup might otherwise use to invest or grow its operations. So, in order to finance slow-paying accounts receivable or to resolve short-term cash-flow issues, you may want to opt for a fast invoice finance solution. Invoice finance can help your startup improve cash-flow, pay workers or suppliers, and reinvest in operations and expand earlier than you could if you had to wait until your customers pay their dues in full.
Don’t over-estimate future sales volume
Revenue predictions go hand in hand with cash-flow management, and although it’s crucial to be optimistic, it’s sometimes better to be realistic with your sales forecasting. For example, the holiday period is amazing for companies and it isn’t unreasonable to anticipate your sales volumes to rise. However, predicting that they will double or triple can be a bit far fetched. Anticipating your startup will have more money than it actually will, can damage cash-flow and throw off budgeting.
That’s why it’s crucial to develop a realistic forecasting model based on real figures and historical evidence. Utilizing historical revenue information from your own company, or even similar enterprises will enable you to build a basis for tracking trends and forecasting future sales. This kind of data, along with market trend analysis, will assist you to come up with more realistic future sales projections.
Have an emergency fund
Most startups often ignore this advice and become so aggressive in the perfection of their newborn business that they neglect keeping something aside for protection. Don’t forget that you’re running a new company and even if the odds are stacked in your favor today, the market can and will change over time. Therefore, if you’re going through some good times, remember to save something for your emergencies.
On-the-spot money requirements can be for a lot of things in a business. It can for bad situations like an accident in the office property. Or, it can be for a good situation like bagging of a new contract in which you need cash to find the supplies. Hence, putting some money aside for these kinds of emergencies will always aid an undisturbed flow of money in your startup.
Running out of money is one of the biggest challenges a startup can face. However, if you stay objective about your financial expenses and sales volumes, rein in unnecessary spending and stay alert to potential emergencies, you’ll be well above your business peers in your potential for long-term business success.