Did you know that nine out of every ten small businesses that fail are due to poor cash flow? When it comes to the financial management of a startup company, cash flow can be one of the biggest pain points.
Of course, the smartest — and most successful — startup businesses never have to over-worry about cash flow. They’ve secured an adequate amount of funding to get them through the rough period and truly understand every inflow and outflow of cash that the company needs.
So what can you do to ensure you’re not a statistic in the failure column? From a high level, stay organized and expect the unexpected. To be a little bit more specific, follow these rules.
–Expect The Unexpected
This year — in the month of November — a tornado ripped through the Midwest, destroying several houses and small businesses. How many of those people actually anticipated such a thing to happen, let alone so late in the year? Rule No. 1 to preventing any cash flows is budgeting for unanticipated expense and emergencies.
Sure it could be a natural disaster, but it could also be a significant customer complaint on the Internet that requires some reputation rebuilding. Or it could be a big client not paying on time.
This may not come as a huge surprise, but one of the biggest cash flow issues involves customers paying late. According to the blog Receivables Exchange, small businesses wait an average of 50 days to finally get paid in full. That number can balloon to four or five months when dealing with distributors.
Always budget some of your cash to handle these snafus.
–Profits Don’t Always Mean Positive Cash Flow
Making money is great, but it doesn’t always translate into positive cash flow, especially when it comes to startup companies. That’s because the idea of a startup is to invest the money you are making back into the business for constant growth.
What happens when you get a taste of success and splurge on a big company party, and then next month, don’t land a single client or sale? Your cash flow can easily dwindle. Remember, even if you’re making money, bills still need to be paid. Refer back to rule No. 1.
And if you are successful off the bat, good for you! Skip the lavish party and buy drinks for the team at the local pub instead.
–You’re A Startup, Not An Established Company
Just because you’re designated as a business, you have a few clients and the culture is really rocking at your company, it doesn’t change the fact that you’re a startup company.
Being a startup means you’re not established. People and vendors may like you, but they don’t trust you. Not yet at least. You’re probably thinking, “Yeah, you’re right, but what so what?”
That lack of establishment means vendors want immediate payment for at least three to six months, until you’ve proven to them that you’re trustworthy. And the space your renting? Make sure to have first and last month’s rent, plus a security deposit. You can see where your cash is quickly heading.
–Miscellaneous Tips & Tricks
The rules above are general guidelines. Smart business folks would even call them common sense. And that’s exactly it: To make sure you avoid one of the biggest paint points of your startup, make sure you’re being smart about your cash flow. Organization is key, so invest in – or establish yourself — a stable system of accounting possibly incorporating a third party or reliable cloud accounting software.
Delay every outlay of cash as long as possible, but make sure you’re not late on due payments. If sales are hot, analyze what season it is and how that might impact sales. Obviously, if you’re a startup selling winter apparel and sales are booming come November, you can probably anticipate that won’t be the case in May.
Keep your focus laser-sharp and avoid any cash flow surprises. You’ll be surprised what kind of success it can bring.