Cash Flow Management For Startups

Photo of author

By Adrian Cruce

They don’t say Cash Is King for no reason. During early business days cash flow management is vital. You want to be really careful as the business struggles or grows. As you just launched the business, what is really important is survival. If you lose control of cash flow the business is not going to survive. Unfortunately, 60% of new businesses remaining profits do run out of liquid funds.

When using a larger part of the working capital it is easy to end up faced with cash crunches. Suppliers cannot be paid and salary payments become difficult. There is a delay that appears between supplier payment and when money comes in from customers. Cash flow management is basically the only real way to solve this problem.

In order to put it as simple as possible, cash flow management is all about delaying cash outlays as customers are encouraged to pay faster. Various things can be said about how to do this but what is really important for the new business is what follows.

Cash Flow Basics

Cash flow can be defined as funds movement out and in of the business. It is normally tracked quarterly, monthly or weekly. For new businesses it is better to track as often as possible. 2 cash flow types exist:

  • Positive – cash enters businesses and the amount is higher than the cash that leaves the business.
  • Negative – the amount that leaves the business is higher than the amount that is incoming.

A negative cash flow is a huge problem for the business. The first step usually taken is cutting expenses but this is usually just a quick fix.

Also Read:  McDonald's Franchise Tips - How to Succeed With a McDonald's Franchise

Profit Does Not Guarantee Positive Cash Flow

A common business mistake inexperienced entrepreneurs make is thinking that having profit guarantees a good cash flow. Your PL statement (profit and loss) is not enough to control cash flow. You want to also think about other factors like inventory, taxation, capital expenditures and accounts payable. Proper cash flow management means you have to focus on absolutely all cash sources, incoming and outgoing.

Locate The Breakeven Point

The reason why you need to know when the business becomes profitable is not because it affects cash flow. It is because it allows you the possibility of setting a really early goal to chase, a target that helps you to project the future cash flow. Negative profits are really bad when combined with a negative cash flow. Always focus on managing cash flows while looking towards reaching the very first profits moment. Breakeven analysis is needed. This practically means you know when you are right between a positive and a negative cash flow.

Always Measure Everything

The important thing in cash flow management is figuring out how much working capital is required. In order to do this you want to think about various aspects like:

  • Necessary inventory
  • Overdue invoice amounts
  • Cash that is tied up
  • The time difference between paying suppliers and getting money from customers.

In order to manage all this you want to keep control and track everything. This means you need an accountant, a bookkeeper, spreadsheets, accounting software and all that you can use. When you anticipate money outflows and inflows you find it much easier to control everything. Start measuring all important metrics as soon as possible.

Also Read:  Should You Bring in A Partner to Strengthen Your Startup?