Startups 101: 5 cash flow secrets you need to know
You might have a great business model, but if you don't pay attention to your startup's cash flow, you're setting yourself up for imminent danger. Unfortunately, a lot of small businesses think of cash flow for the very first time when they hit trouble. Good cash flow management, in layman terms, means understanding every inflow and outflow of cash. No matter how profitable you are or how many investors are interested in supporting your business, if you can't successfully manage your company's cash flow, you are bound to fail. As a startup, here are a few things you must know about cash management.
Documenting cash flows
No matter how small your company is at present, it is bound to have more financial transactions than you can possibly commit to memory. It is, therefore, necessary to maintain books that document every little profit and expenditure you make. This practice will prove to be a boon when your company expands and your finances run deeper and you will also be able to cut down unnecessary expenses and double your profits by carefully examining your cash flow statements.
Your company's spending might be equal to or less than the incoming profit, but if the outflow of money happens faster than the inflow, your business can get caught in a surprise cash flow problem. In such a scenario, even if your monthly budget is in place, neither banks nor investors will be able to help you out.
Many businesses are hesitant about borrowing cash as the interest rates involved can prove to be heavy on their pockets in the future. However, as a startup, make sure you are aware of the bigger picture before you decide against taking a loan. Paying your employees late or turning down big business opportunities due to the lack of cash flow are a few mistakes that can cost your company a lot more than money in the long run.
99 out of 100 companies run into unanticipated troubles in the first few years of their operations. Be it natural calamities like floods and earthquakes or man-made troubles like quitting of key personnel or losing a major client, startups need to be prepared to face the cash crunch that comes along with these emergencies. If an entrepreneur is well prepared for such rainy days, nothing can stop his/her company from attaining success.
The Kauffman Foundation reports that late payments are among the biggest challenges startups have to combat. When a startup's biggest client pays late, it can disrupt the company's cash flow to a major extent. Same goes for distributors who delay making payments to startups by approximately four to five months. If the company doesn't have cash reserves for days like these, its operations and functioning can come to an abrupt halt.
I then face of a cash crunch, budding entrepreneurs don't know how to react and they end up making mistakes like not paying important bills on time. To avoid such situations, startups should educate themselves on how to maintain a healthy cash flow from the very beginning.