1. Seven tips for managing cash flow as a startup

How to manage cash flow as a startup

September 20, 2021

The first few months and years can be a whirlwind of activity for small business owners. Hiring staff, chasing payments, managing stock levels and purchasing equipment are just a few of the many tasks you might have to carry out.It can be easy to gloss over your business finances and not give them the care and attention they need to check that your business is in a good position. All startups start out intending to turn a profit, but many of them make the mistake of focusing too much on this figure when looking at the financial statements. Your business might be making a profit, but it doesn't necessarily paint the whole picture. A much better way of gauging your financial health is to look at cash flow.Cash flow is the lifeblood of a business. A cash flow tracks the amount of money coming in (cash inflows) and going out (cash outflows) at any given time, usually calculated on a month-by-month basis as part of a cash flow forecast. You always want to ensure a positive cash flow, so you have sufficient money to cover bills and expenses. However, the very nature of being a startup means that your income and expenditure can vary wildly from one week to the next.This is why cash flow management is so important. Over-committing on spending for recruitment, equipment or technology, combined with suffering a drop-off in sales or revenue, can put you in a position where you quickly find there is more money going out than there is coming in, resulting in what's known as a negative cash flow. This spells danger. Indeed, studies estimate that around 80-90% of small businesses fail because of insufficient cash flow, but this doesn't necessarily mean doom and gloom for your business. We've set out a number of ways to stay on top of your cash management, helping you to maintain a good cash flow.

Seven tips for managing cash flow as a startup

1. Put an accounting system in place

If you don't have a system in place for managing your accounts, then you can quickly lose track of your finances. Imagine being faced with stacks of invoices and receipts each month but not knowing which of them you've already paid and which are still outstanding. Likewise, how do you which of your customers have paid you and which of them you need to chase up without proper records?Recording your income and expenditure allows you to work out exactly how much cash you have available, which you can use to make informed business decisions. For instance, if you know that your cash reserves are running low, you might decide to delay hiring a new employee or limiting the amount of overtime offered for that month until sales pick up.Cash flow problems can quickly build-up, and it only takes a couple of months of having a poor cash flow to put you in severe financial trouble. That's why it is essential to have a real-time picture of your finances, rather than something you look at every couple of months when you remember to check your statements.Managing your finances is easily achieved by using accounting software – and you don't have to be an accounting whizz either.Ember does all the hard work for you, such as automating your transactions, categorising expenses and connecting your business bank accounts. You can log in at any time and see your balance and statements, and have the option of setting up payment reminders, so you don't miss any deadlines.

2. Pay attention to payment terms

One of the most significant expenses that many businesses have is paying for goods or services from vendors and suppliers. Luckily, many companies allow you to buy goods on credit, meaning you can 'buy now, pay later'. With this type of purchase, you will need to record the entry in your accounts payable and pay the supplier on or before the payment deadline.The obvious advantage to buying goods on credit is that you don't have to pay immediately, so your money stays in your account for longer.When you receive your invoice from a supplier, take a good look at how long you have before the payment is due. If you have 30 days to pay, nothing stops you from waiting until the deadline. Don't make the mistake of thinking you have to pay straight away, especially if there is a risk it will leave you short of cash for the rest of the month.However, as you'll see below, suppliers will sometimes tempt you into paying earlier by offering discounts if you pay within a certain number of days. If you have the cash reserves to pay earlier, then there is no sense in delaying payment just because you can; take advantage of the discount offered.

3. Encourage early payments

The flip side to delaying payments to suppliers is that you ideally want all of your customers to settle their bills as early as possible as a business owner. You can clear the outstanding debt on their account and use it to cover ongoing and future expenses.As stated above, you can encourage early payments by offering discounts and incentives to customers who pay upfront or within a certain number of days (e.g. within seven days). If you provide a monthly service, you can also tempt customers to sign up by offering a reduced deal for an annual subscription (e.g. 12 months for the price of 11). You might think offering a discount is just cutting your margins, but it reduces the risk of late payment and accelerates your cash flow.

4. Monitor what you are paying for

You might think this is an obvious point to manage, but it doesn't take long for startups to build up a lengthy list of regular monthly expenses. Keep an eye on your spending, and don't be afraid of tightening the purse strings if it stretches your cash flow.It's not just the extras that build up either. You can accrue all kinds of subscriptions to tools, services, magazines etc., especially if you have a few different teams in your organisation. As an example, let's say you are a marketing startup. You might be paying for SEO tools, design software, online planners, content management systems and more – all of which add up to a costly sum.When you have a lot of regular outgoings, it can impact your cash flow. All it takes is a drop-off in sales for a couple of months or an unexpected expense, and suddenly you don't have enough money to pay a supplier on time or cover your employee's salaries. Knowing precisely what is going out each month means you can quickly make decisions about cutting back if it becomes necessary.

5. Carry out regular financial forecasts

Financial forecasts are great for understanding the current financial health of your business and planning for the future. Based on your current income and expenditure, you can predict what the following months and years might look like. Even though it is only an estimate, a forecast can help you decide pricing, purchases and strategies for growth.A vital part of a financial forecast is the cash flow statement. It shows you your current balance and what it might look like at a given point in time, after factoring in the money owed to you from debtors, the money owed to suppliers, and any outstanding loan repayments.Want to know what your cash flow would look like if you charged more for your goods? Or what the effect would be of taking on more employees? Simply amend the relevant figures in the forecast and see how it alters your finances. You can do this for a whole range of eventualities as well.

6. Put aside a cash reserve

Even with careful planning, unexpected events happen. You might be forced to write off a payment from a customer because they can't pay, or have to replace some office equipment that has suddenly broken urgently. Without proper financial management, any unexpected business expenses or bad debts can quickly sour a healthy cash flow.Having a cash reserve isn't just helpful for when things go wrong. What if you have the chance to pick up stock at a discounted price or fill an order that requires you to invest in equipment to increase production? Business opportunities can present themselves anytime, and you'd like to be ready to take advantage.

7. Make the right decision when it comes to hiring

Hiring staff can be costly. Not only do you have to factor in their salary, but you also need to spend time interviewing candidates and training them in their new role(s). As a startup, it can be daunting taking on employees, especially if you are operating on a tight budget. Here are a couple of things to consider that can make this process much more straightforward:

If you don't want to commit to hiring someone in a full-time position, think about advertising the job as a part-time or fixed-term contract.

Cut down job advertising costs by asking your current employees if they know anyone suitable for the position. If you have a company social media profile, you can also advertise the job there to find interested candidates.

Target qualified and focused individuals. The first people you hire in your business can play a significant role in making your company a success. Try and find someone with similar goals which is self-motivated and eager to share the journey with you.

We've highlighted that cash flow can be volatile, but you can give yourself the best chance of keeping your business in good financial health by following these tips.

Rachel Cameron-PotterContent Marketer

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