Cash is king in business and good cash flow management is essential for the success of your startup. Think of cash flow as blood flow and you’ll understand just how vital it is to the health of your business; without it, you’ll die. That sounds bleak, but it really is important to manage your cash flow well from the very beginning and protect your business against any problems along the way.
Even if your business is very profitable, you’ll struggle to cover your costs without sufficient funds available. However, at the same time, an excess of cash suggests that you’re not re-investing enough into scaling your business. Finding a balance takes accuracy and attention, but it can be done by following the steps outlined below.
1. Regularly Prepare Cash Flow Statements
Before you can start planning for the future you need to get a clear picture of where you are right now. This is where cash flow statements come in. A cash flow statement provides an overview of how much cash is coming in and going out of your business. This then allows you to perform a detailed analysis of the financial health of your business.
A cash flow statement requires a lot of data and so a cash flow calculator can be very useful in helping you prepare this document. You also might want to think about hiring an accountant to ensure that your statement is accurate, since getting this wrong can lead to bigger mistakes down the line.
2. Create Cash Flow Projections
It’s important to understand what your cash flow is likely to look like in the months to come so that you can plan ahead and manage your finances wisely. Realistic cash flow projections can help you to invest your money at the right moment and account for any potential pitfalls along the way. This process can be time-consuming and complex, so again it’s worth using accounting software or enlisting the help of a professional. These projections are incredibly valuable when it comes to scaling up your business and so they’re worth investing in.
3. Prepare a Safety Net
Any entrepreneur will tell you that it pays to have a safety net, particularly when you’re scaling your business. Investing in growth can lead to short-term negative cash flow which is perfectly okay, so long as you’re prepared for it. A cash reserve will help to smooth things over when you’re having cash flow problems and ensure that you have enough funds available in order to pay suppliers and staff. It’s also worth investigating whether a credit card or line of credit could be beneficial to your startup to help you keep operations going when cash runs dry.
4. Plan For the Long Term
As important as it is to have a handle on where you are right now, your business won’t be this way forever. After all, the ultimate goal is to grow out of the startup stage – and this means big financial changes. Furthermore, there are many factors outside of your control that could affect your cash flow in the future, such as inflation, recession or late payments from clients. It’s always best to be prepared for the worst so that your business is protected against any eventuality. Take some time to research and forecast potential changes in market conditions that could impact you in the future. Again, it’s worth consulting your accountant for advice that could help to protect your business.
5. Stay On Top of Invoices
It’s important to manage cash inflow effectively and sadly, you can’t just bank on customers always paying you on time. You need to ensure that you send invoices in a timely manner, set clear payment deadlines, send reminders and chase up late payments. If you have a large customer base, this can be a time consuming process and it may be worth looking into accounting or invoicing software to take care of this for you. Not only does this help you to manage cash inflow accurately, it also frees up your time for more valuable pursuits.
Cash Flow is Key to Your Success
There’s a lot to think about as an entrepreneur but managing your cash flow well is one of the most important ways of ensuring the financial health of your business. Not only does this help you to protect your startup against market changes and late payments, it enables you to invest your money wisely and at the right moment. Good cash flow management isn’t just about protecting your business from collapse, it’s also vital to help your startup to grow and flourish.
If you’d like to talk to us about how we work with startup businesses like you, book a free consultation with us.