3 tips for better cash management at your startup
There has never been a better time to start your own business venture in India. The past year has witnessed the country transforming into a hotbed of entrepreneurial activity, owing to progressive initiatives mooted by the Central and State governments. According to NASSCOM, a whopping 40 percent growth will make India a haven to more than 4,200 startups by the end of the year. However, one question persists: despite having a conducive environment to grow and thrive, why do a majority of small businesses struggle to keep their heads above the water? If one scratches the surface, it is easy to see that the real challenges to staying afloat in the face of adversity is, in fact, intrinsic to the organisation.
Amidst the excitement of daily business operations, it is easy for small business owners to underestimate the importance of processes such as cash management, and put them on the backburner. The consequences present themselves quickly: entrepreneurs are left empty-handed when they need to pay their employees and vendors, and sometimes their own personal bills.
Though idle petty cash accounts for only 1 to 3 percent of total current assets, it is imperative that it does not dry up. Like blood in the human body, there has to be a constant flow in order to sustain the business at all times. At every step of the way, startups need to be prepared for financial curveballs that appear in the garb of delayed invoicing and disbursements, indefinite floats and flawed go-to-market strategies. Operating in a region where Cash On Delivery (COD) has become the preferred mode of payment also adds more perplexing challenges to the mix. Only a handful of startups are getting it right, and live to tell the story.
Cash management 101
Though critical, this practice is not as complicated and alarming as we have historically been led to believe. It is actually quite simple if entrepreneurs are aware and equipped to preempt financial pitfalls:
Culture of frugality
From the get go, establish a culture that encourages thrift. While the startup is still finding its feet, spending happens faster than revenue is raked in. Therefore, it is in the company's best interest to be as lean as possible in early investments. Reserve cash for 'cold winters' such as pricing revisions, bad debts or slow sales. It is also a good idea for product companies to manage their inventories wisely. Too many products in stock can lead to unsold pieces and too little could mean lost sale opportunities.
What you can do: Take a leaf out of the best practices of Decluttr Me, a startup that champions lean spending. Rather than outsourcing their artwork to exorbitantly priced designers, they took the DIY route with unconventional services such as Fiverr and Canva. Hire a lean team that is willing to roll up its sleeves and go beyond the call of duty, rather than unnecessarily overstaffing the company during its fledgling days. Resist the urge to splurge on frills such as expensive office furniture and decor when you have bigger financial commitments to take care of.
Invoice faster and better
Studies show that slow-paying customers are posing the biggest challenge to startups' cash flow. For a startup to flourish, it is essential to shorten billing cycles in order to cover for any delays in recovering costs incurred.
What you can do: Sometimes, asking for a down payment before the commencement of a project can make entrepreneurs uneasy. But building an honest relationship with clients is the key to helping them understand the value you add to their businesses through the costs incurred in the process. When they do adhere to your policies, reciprocate their cooperation with a discount or incentive.
Let automation software do the heavy-lifting for you!
There is little place for nasty surprises in startups. Many a time, entrepreneurs set out believing their offering will take the market by storm. While some revel in the success of their ideas taking wings, the others are left to wonder where they went wrong. Even if you have put in immeasurable effort in bringing your idea to life, there is always a chance that it may not make the cut. Forecasting cash flows is predictive of such contingencies and helps to make suitable pivots to business strategy. It is also a credible method to build investor confidence in one's business.
What you can do: Disburse funds to employees across geographies for incidental expenses, track its use in real time and settle petty cash accounts with 100 percent accuracy. With the use of smartphones entrenched deeply in the way we do business, it is possible to predict, monitor and report cash flows with the click of a button. Imagine the potential of cash management without dealing with physical cash in the first place. With the adoption of automated solutions to manage petty cash, it can now become a reality.
In summary, good cash management is king and speaks volumes about an entrepreneur's understanding of his/her business. The benefits are evident for startups who have consciously welcomed technology into their folds, to do the job. Apart from balanced cash flow in the business, it frees resources from the mundane rigmarole, such that they can be allocated to more productive functions. Therefore, an automated approach to cash management is quickly emerging as an efficient way to tide over rough patches and to re-emerge profitable for years to come.