How to Keep Cash Flow as a Business Startup?
| 5 minutes read
Cash Flow Management in Business
- As per the report published by Fundable, approximately 0.91 percent of startups are funded by angel investors (an individual who invests in startups), while VCs fund nearly 0.05 percent.
- Guidant Financial of small business entrepreneurs found that around 10% were still using funding from family and friends.
- Economic Times, a business portal, reported, that more than 1,300 start-ups are registered in India, also India is recorded as the third largest startup ecosystem in the world.
It is genuinely said before you can run, you need to walk – crawl even. The concept is applicable when it comes to a startup. The prominent problem startups suffer the lack of cash flow. Therefore cash flow is important in every business.
Now, the question arises, How to maintain the cash flow? Or what measures do we need to take for the continuous cash flow in a startup? The situation is not complicated as it looks.
“Money/cash is a precious asset for any business. It is truly a King Maker– it is a fuel that keeps the engine running – most business entrepreneurs don’t have a strategy on their cash flow,” says Philip Campbell, a former CFO, author of Never Run Out of Cash. “Organizations deprived of cash-flow management are causing more business failures today than ever before.”
Running a business startup without specifically managing cash flow can even get the wealthiest entrepreneur in trouble. You’re successfully shooting yourself in the foot and downfall of all the great work you’ve managed in terms of proof of concept, investment, and R&D.
Some entrepreneurs might agree, and few disagree- “If you’re an entrepreneur, cash flow is not at the top of your list for reasons to run your kingdom. Most of us run our own business for other reasons like controlling our destiny, not wanting to answer to someone else, or taking pride in our work product.” Somehow it might or might not be true- in terms of understanding the concept of running a business.
Is cash an Asset?
Yes, even though cash flow is a fundamental aspect of a business – one must treat it with great care and skill. Since generating cash to meet overhead, payroll, and other monthly expenses can become complicated. Therefore, it’s important to know how you can maximize your businesses’ cash flow. Without a steady flow of cash into your company’s funds, the industry may snort and eventually die.
Convert into Cash
It is easy to get wedged up in impressive strategies for calculating and tracking cash; most of the basics involving cash flow are common sense. Foremost, you need to translate sales into cash as quickly as possible and bank it.
Once you’ve reached a respectable amount of cash flow for your business, your business needs to guard it zealously. That means saving as much of it as possible and letting it out the door as payments only when required.
The objective is to make more cash flow (positive cash flow) more room than exits (negative cash flow). But cash flow is disreputable, which is not easy to predict, and slow-paying customers’ unexpected expenses, and can quickly turn a sunny outlook into a dark nightmare.
Various fancy terms revolving around the market claim to increase the cash flow of your business, but all details are not true. Therefore it is important to know a few crucial cash flow management tips which can stand your business for the long term. Generally, eight out of ten startups eventually die due to a lack of cash.
1) Recognize Business Risks & Prepare In Advance
There are various risks involved while running a business, and serious challenges should be expected soon. You need to consider some situations such as ‘What if that big order suddenly comes in?’ or ‘What if a bulk order is canceled unexpectedly?’ It is a kind of risk where investigation becomes part of your cash-flow budgeting process.
Analyze it with this easy method – If you’re using a spreadsheet to enter cash inflows, just reflect a hypothetical situation by adding or deleting inflows. The effects in the following weeks and months should immediately be visible, so you can consider what you would do if the event befell.
2) A Separate Bank Account For Your Business
A basic mistake while starting a business – especially among start-ups – is mixing business and personal bank accounts all at once. Since initial financing often comes from the owner’s savings, it’s easy to see how that can happen.
Business experts strongly recommend having a separate bank account for your business. You can ask your bank to issue a credit card, make business-related purchases on that card, and pay through your different company account. In addition, most credit cards provide management reports that reveal the types of purchases you made over the month and the past year. This information can be used in your cash flow budget for the following year.
3) Keeping Buffer Money
Once you find out the source of cash flow, you must ensure your business has enough cash to fund your working capital needs. It is advised to keep three months’ worth of outgoings for a rainy day in the bank. If that’s the case with you, make sure you have a buffer of some sort, either personal funds available or a revolving credit facility.
4) Eat If You Can Digest
It simply means dealing with customers if you can fulfill the services on time and accurately. From a business point of view, cash flow management is all about hammering on the right timing. The prospect of a significant new client is appealing to most startups. The formula of agreeing and figuring out what to do later is revolutionary and inspiring, but it can put you into some serious trouble.
Postponing work may be the wiser option only if the costs of delivering a project are exceptionally high. Try offering a discount or extending the deadline for the order or service. It will allow you more time and minimize the burden on cash flow.
5) Focus on Cash flow, not on Profit
Agnes Cserhati of AC Power coaching estimates that 90% of the startups do not have a proper cash flow plan from the establishment, despite having forecasts of profit margins for years ahead. This is a common reason for earlier business failure than expected.
“She says, if you increase the cash flow, you can also increase the profit, but earning profit is meaningless without increasing cash flow.” “Most businesses cannot fulfill proper cash flow even after a year. They might have been a profitable business, but they need to have a good cash flow to survive in the next coming years.”
Agnes Cserhati also inspires young/new businesses to work with trusting, reliable, faster-paying clients initially, even if it comes from smaller clients and slimmer profits margins.
Startup owners usually learn one early in life – “Cash is the ultimate king.” Building an adequate cash stockpile provides maximum benefits and flexibility to any business while enabling its owners to sleep soundly at night.
Without cash, earning profits is meaningless because profits are just like a pain killer with temporary relief; likewise, profits won’t help run a business for longer times. Many of the profitable companies on paper have ended up in bankruptcy because the cash coming in doesn’t match the amount of money going out. Firms that don’t exercise good cash management may not be able to make the investments needed to compete, or they may have to pay more to borrow money to function.