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Cash flow. How Startups should manage it?

Cash Flow Management
Cash flow. How startups should manage it?

Introduction

Something that we keep saying at EC, is how launching a startup it’s not an easy feat, even though in the end, it will be worth it. Many founders, especially those who start alone, will have to face business’ areas where they won’t have as much experience as these require. For example, managing cash flow. As cited on our “Top 9 Reason Why Startups Fail” blog, and according to Statista,  29% of startup failures are caused by its cash flow. For startups, cash is king, and managing it efficiently, is the top priority to succeed. No matter why you’ve decided to launch your own startup, there will always be one goal that you’ll share with every other business owner, which is to generate income. It’s the fuel that keeps the engine running. Below, we’ll mention the top 9 tips to effectively manage cash flow.

Understand where your cash flow comes from

There are specific areas that are really important to analyze, especially when it comes to “in-flows” and “out-flows”. Whether the money is coming in or out of the business, entrepreneurs must understand where it comes from and where it’s going. Key areas to focus on for inflows, are the average revenue per account and customer lifetime value. For outflows, you should be looking at the churn rate and the cost of customer acquisition.   

Control your spending to ensure good cash flow

Cash flow is all about timing and organization, especially the first month. Turning down or postponing work may be the wiser options if the cost involved, to deliver a project, is particularly high. Many startups don’t make profit in the first months and entrepreneurs must wisely choose where to invest within the business. With the help of a spreadsheet, if you are old-school, or a software to automate the process, founders can track their spending daily, to ensure money it’s been spent on the startup’s priorities and necessities.  

Have a savings account

Every entrepreneur should start transferring some funds into a rainy day account from day one. You can plan for the future, but you never know for sure what’s around the corner. It’s nice to always be positive about things. However, at times like this, especially after Covid, you need to be a pessimist and prepare for the worst. A small quantity kept in reserve will help you to keep calm in times you feel pressured. As a result, you get to think straight and make better decisions. Also, it gives you time to pivot in uncertain times.

Building trust with your customers

Customers will always be the most important thing in a business. The product or service must satisfy their needs, and the money they pay for it, keeps the business afloat. Therefore, developing customer-friendly policies and creating the best customer experience, will lead you in the right direction to cash flow stability. The more you learn about your customers, the better you will be able to respond to their needs and the more they’ll be happy to pay. 

Use of Marketing to generate cash flow 

The use of some marketing strategies not only help your business to increase its awareness. It can also help to generate more cash flow. For example, encouraging invoice payments with discounts for paying early. It may impact the profits, but it will help your management of cash flow, by incentivizing customers to make payments earlier. Less money is better than none.

Money management help 

Looking at the startup’s finances can take up to 80% of the founder’s time. If the founder wants more time to be able to participate in other business’ sectors like managing, marketing, and growth, he/she will need help from a CFO or an accountancy company, to handle the numbers. It doesn’t matter how great you are with money. Your attention and time are constantly in demand, so get the help you need.

Hire smart

As said above, you won’t be able to succeed if you are completely alone. However, you must be smart about it. Getting employees will always be a fine line for startups,. Nevertheless, hiring skilled people with great expertise will save you time and money. Don’t risk the business’ cash flow hiring the wrong people.

Stay on top of receivables

When you are doing the right thing and paying your bills on time, you should expect the same from your clients. As a founder you must stay on top of things and don’t fall behind. Startups can’t afford late payments from customers, as the cash flow heavily relies on it. Making all invoices “due immediately”, moving towards automated charging as soon as possible, and following up on payments, will ensure healthy cash flow.

Don’t confuse Profit with Cash Flow

Although a positive cash flow is needed to generate profits, profit will never be equal to it. Looking at the business’ profit and loss, won’t give you a hint on how your cash flow is. Profit is simply defined by the rules of accounting, as the revenue minus expenses. On the other hand, cash flow is collecting that amount, which later gets involved in other figure factors, like accounts receivable, inventory, accounts payable, capital expenditures, and debt service. This clarification is important to avoid errors that can negatively affect the business, and to better structure it to have a positive cash flow and allow the company to grow and increase profits. 

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