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10 Essential Tips on Managing Cash Flow as a New Business

Tech Finance Business

Working with startups and being a startup ourselves, we know too well that one of thw main reasons businesses fold is because they run out of cash. We've seen it all around us, startups over extend themselves and because they are not tracking their money at all times, they wake up one day and realise their year long runway has been reduced to a week. The stories are out there to be read and headed, but startups can avoid failure by getting smart about how they spend their startup capital.

Related: Quick Guide: How to Organise Your Company's Buying Process

"Despite the fact that cash is the lifeblood of a business - the fuel that keeps the engine running - most business owners don't truly have a handle on their cash flow," says Philip Campbell, a CPA and former CFO, author of Never Run Out of Cash. "Poor cash-flow management is causing more business failures today than ever before."

Trying to run a business without meticulously managing cash flow can land even the richest round raisers in trouble. You're effectively shooting yourself in the foot and undoing all the great work you've managed in terms of proof of concept, investment and R&D.

Here are 10 essential tips to help put your business firmly on the path to successful growth. 

1. Your first priority should be spend control

Yes, all businesses aim to make a profit and become a successful commercial entity. But before you can run, you need to walk - crawl even. When you setup a business, especially if you have raised capital, your main focus needs to be on cash-flow and spending. 

You can start by tracking things in a spreadsheet if you need to but do investigate software that can do the tracking for you. Any good spend control platform should bring automation, cyber security and remove human error from the spend control equation.

“Every month isn’t enough,” says Derek Flanzraich of Greatist. “Nearly every week I’m checking both my personal and business finances.” We think it should be every day and in real time.

2. Rainy day reserves are always a good idea

The unpredictable nature of business is just that, unpredictable. A solid cash reserve for any unforseen circumstances or emergency pivoting will make trying times less hectic and will help cushion any blows. Having a reserve will also allow you to stay calm and keep focused on growing the business, steadying the ship across any turbulent waters.

3. Get help managing money

So here's the main problem a lot of startups have. The founders manage the money - tracking, handling, making payments. This should not happen. Managing the money is a time consuming, complex task and it will take up 80% of your time. Most founders think they are much more efficient than they actually are, by the way. If you are truly honest with yourself, you are managing money 80% of the time which only leaves 20% for growing and flying the flag for the business. That's not a good formula.

Hiring a CFO or an accountancy company to do this for you is a must.  No matter how great you are with money, your attention and time are constantly in demand and this means you will drop the ball. Trust us, we've seen it happen.

Controlling cash can also be streamlined by bringing in technology to help with anything from accounting reconciliation to cross currency purchase control and supplier management. Having a solution in place that can offer a real time view on company money at all times will allow you to focus on important things whilst knowing you can always check everything is under control without having to trawl through versions of Excel spreadsheets.

4. Keep your spend priorities straight

Being able to prioritise spend is a crucial and knowing what's necessary vs "nice to have" can make the difference between success and going bust. iPads for the whole team, free yoga classes for everyone and a swanky office are not essential to your operation. Keep these luxuries for when you're profitable.

Minimizing spend on everything from office space to the number of software subscriptions your team forgot to cancel after the free trial will ensure money goes on growth, not down the drain. 

5. Get money you're owed as soon as possible

We fell into the trap of letting customers get away with paying us late in the very beginning. As a brand new company, we were so happy to have customers and so eager to please that we ended up bankrolling them for 2-3 months. This is absolutely not a good thing to do - unless you are a bank. Make all invoices “due immediately” and move towards automated charging as soon as possible. Tip three will also help here as having someone to keep an eye on receivables and handle customer follow-up will ensure healthy cash flow.

6. Pricing discounts

One option of increasing cash flow is to offer discounts for early payments. Yes, this practice may impact your profit margin, but it will help your management of cash flow by incentivizing customers to make payments earlier than billing cycles typically require. You can also take ask for early payment discounts from your suppliers, but make sure you're not left with a cash flow shortfall.

7. Don't bite off more than you can chew

Cash flow management is all about timing. The prospect of a big new client is irresistable for most startups. The mantra of say yes and figuring out what to do later is revolutionary and inspiring but it can spell serious trouble.

Turning down or postponing work may be the wiser options if the costs involved to deliver a project are particularly high. Try offering a discount for postponing or extending the deadline for the order or service. It will give you more time and lessen the burden on cashflow. 

8. Profit vs Cash Flow

Profit does not equate cash flow. You can't just look at your profit and loss (P&L) and get a grip on your cash flow. Many other financial figures factor into your cash flow, including accounts receivable, inventory, accounts payable, capital expenditures, and debt service.

"There is a secret that very few business owners have discovered (and the accounting community has not done a good job revealing): knowing whether you earned a profit (or created a loss) is not the same as knowing what happened to your cash," says Campbell. "Profit, as defined by the rules of accounting, is simply revenue minus expenses. Invoicing a customer for products or services you sold to them creates revenue. Actually collecting the money on that invoice is what creates cash."

A positive cash flow is needed to generate profits. You need enough cash to pay your employees and suppliers so that you can make goods/deliver the service. It's the sale of those goods/services that helps generate a profit. You need to structure your business to have a positive cash flow to allow your company to grow and increase profits.

Founder of Zappos, Tony Hsieh, says, “Chase the vision, not the money. The money will end up following you.”

9. Hire smart

Now, hiring is always a fine line for startups - you don't want to go too crazy in the beginning but you don't want to wait too long and stretch yourself so thin that you allow things to go wrong. Recruiting highly capable and skilled people will save you the time and money hiring mediocre staff will cost.

A study by the University of California-Berkeley Institute for Research on Labor and Employment shows it costs an average $4,000 to hire an employee. Don't waste that money on the wrong people.

10. Get tech in

Managing cashflow in spreadsheets may serve you in the beginning but it is not a sustainable or a safe way of controlling your cash. Keeping your financial data secure from data loss or theft is key. Particularly now when cybercrime is as sophisticated as it's ever been.

Technology will also enable you to gain access to spend information from anywhere, at any time. This is particularly important when you start opening a second/third office in a different countrey and having to manage multi-currency payments. Again, we have seen this time and time again - different ways of managing cash flow in different offices, without a unified layer of intelligence on top. Get clever, get tech.

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