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5 Simple Ways for Startups to Improve Cash Flow Management

5 Simple Ways for Startups to Improve Cash Flow Management

7 Sep 2023

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.

4 Common Cash Flow Mistakes That Small Business Owners Make

4 Common Cash Flow Mistakes That Small Business Owners Make

12 Jul 2023

Good cash flow is essential to the financial health of your business. In finance terms, cash is comparable to food – without it, your business will run into many health problems and eventually starve. Cash flow problems are often cited as one of the main reasons that small businesses fail, so you need to make this a priority. We’ve put together a list of the most common cash flow mistakes business owners make so that you can avoid these traps and keep your company in good financial stead.

1. Unrealistic Budgeting

Many small business owners underestimate how much it costs to get started, and this can lead to an array of cash flow problems. If in doubt, always overestimate your costs in order to avoid any nasty surprises.

Furthermore, if you underestimate how long it will take your business to become profitable, you may find yourself facing some serious cash flow problems. It’s important to create a realistic time frame for your business to reach profitability. Remember to account for seasonal peaks and troughs, too.

Many small business owners delay hiring an accountant until after they launch, but working with a quality accountant who has experience of your industry can help you to create a realistic budget that will save you a significant amount of time and money in the long run.

2. Not Creating a Cash Flow Budget

In addition to a business budget, you should create a separate cash flow budget so that you can understand when money will be flowing in and out of your bank account and plan accordingly. Money tied up in unpaid invoices is no good to you when your suppliers require payment right now. You must ensure that you always have enough cash to continue operations, so creating a cash flow budget is vital.

3. Slow Invoicing

One of the simplest ways to ensure a healthy cash flow is to get paid on time. Of course, this isn’t always 100% within your control but there are plenty of things you can do to encourage your clients and customers to pay you faster.

Firstly, when onboarding a new client, make sure that you hash out payment details straight away so that both of you know what to expect. You should both understand:

  • Who will handle the invoice
  • When it will be sent
  • When it must be paid
  • The method of payment.

It’s also worth checking who you should contact to handle any potential problems that may arise.

Secondly, send invoices on time and ensure that all of the details are correct. This will prevent a time-consuming back-and-forth communication to straighten out any mistakes.

Finally, keep a close eye on deadlines and don’t be afraid to send out a polite but firm reminder to customers who are cutting it fine. You may also want to consider introducing a late payment charge to incentivise them to cough up on time, but be sure to give your customers plenty of notice.

4. Not Having a Cash Reserve

Having a cash reserve is imperative for good cash flow management, but many business owners skip this crucial step and then find themselves in hot water later on. In any given business, unforeseen costs will arrive sooner or later and it’s important to prepare for this by creating a cash reserve. This way, you can smooth over any cash flow issues without going into debt or suffering an extreme amount of stress.

Summary

Maintaining a healthy cash flow is one of the most difficult parts of running a business, but it’s also incredibly important to the financial health of your company. Set yourself in good stead by planning carefully and creating a realistic budget to help you avoid overspending. Remember that cash flow and profitability, though related, are not the same thing and so it’s prudent to create and monitor a separate cash flow budget, too. The importance of good cash flow management really can’t be overstated, so when in doubt it’s always best to defer to a quality accountant for help with this essential process.

Did you know we’ve also got a free downloadable eBook dedicated to the most common profit draining mistakes made by small businesses. Check it out here.

Book a free consultation here, to learn more about how our bookkeeping services can support you.