Cash Flow Management Tips for Startups

While managing cash flow is important for any company, it's crucial for startups. When you're scaling your business, you're spending money quickly and don't have the same cushion to fall back on as your more established competitors. Many ventures fail at this stage not because of their business plan, but because they simply run out of funds. Some simple and effective cash flow management tips, tools, and strategies can help you stay financially solvent and secure.

1 - Focus on cash flow

Startup founders can spend all their focus on growing revenues and improving profitability. While these are both crucial financial goals, you need to pay attention to your cash flow as well. Cash flow is the amount of actual money coming into your business versus the amount of money you spend on expenses.

You could be making tons of sales but if clients are slow to pay, you might find yourself with a successful business on paper that can't cover payroll or its bills. That's why you should track cash flow, especially when you're scaling your business and every dollar counts.

2 - Spend startup capital cautiously

Whether you launched your startup through your own personal resources, a loan, or investors, that initial business funding will not last forever. Think carefully about how you spend those limited dollars, whether it's with hiring, office space, equipment, marketing, and other overhead.

If you're going to spend on something, make sure it's essential for business growth and will help you reach your financial targets, including better cash flow. You should also focus on cost-effective strategies, like marketing on a budget. This mindset will not only help with your current budget but could also impress future lenders and investors by showing you'd use their money wisely.

3 - Set your profitability breakeven point

It takes time to build up a business. During this initial stretch, you're going to be spending more than you bring in from revenues. That's ok for now, but at some point will have to change. As part of your business plan, set a goal for when you think your startup would reach the point of profitability: where you're in the green and making more than you spend.

This way you can set milestones and track your progress toward getting there. Each step you take to close the gap between operating at a profit versus a loss will help your cash last longer.

4 - Push for earlier payment from clients

In the rush to close a deal, you might be eager to accept any terms, even those where the client has months to pay you. If you do this with everyone, you can quickly fall into a cash flow crunch. In the same way you negotiate price, also focus on the payment terms. Push for immediate payment or shorter time frames, like 15 days after you send the invoice. If a client only accepts a longer timeframe, you could also offer discounts for paying ahead of schedule.

In addition to pushing for earlier terms, you should carefully track your accounts payable deadlines. As soon as someone is late, reach out with a reminder. You'll get paid sooner and reduce the chance that a client skips paying you altogether.

5 - Try to delay accounts payables

On the other end, do what you can to delay paying your own suppliers and vendors. When you make a purchase, see what is the longest they would give for payment and wait up until that point to pay. That keeps your startup cash-on-hand for longer and you can keep using it until the deadline.

Now, negotiating later payment dates is easier said than done, especially as a startup with limited credit, history, and business funding. But you won't know unless you ask. Make this another factor you consider as you decide which vendor/supplier to work with. One might surprise you with generous terms in their own eagerness to close a deal for more business growth.

6 - Build a cash reserve

You never know when your business will run into a surprise problem: a major client fails to pay, a key piece of equipment breaks down, or we run into another world-changing event like the COVID-19 pandemic.

Even though your financing is limited and you have lots to spend on, keep some cash in reserve as an emergency fund. Ideally, you should have up to six months' worth of operating expenses, according to Ramsey Solutions. If you're not there yet, put aside part of your sales revenue every month to build this reserve. Your emergency fund could help your startup from getting wiped out from a negative shock beyond your control.

7 - Consider hiring a professional

Cash flow management can quickly take up lots of your time. If you need help but don't have the resources for a full-time employee, you could consider outsourcing this work to an accountant or bookkeeper. The improved cash flow from their efforts could more than justify their fee, especially if they help with other issues like common small business payroll challenges.

8 - Use technology for cash flow management

There are also software tools to help with cash flow management. One area software can help is by automating accounts receivables and payables. These programs will send out invoices to clients for payment, give them ways to pay instantly electronically, and send them reminders as soon as they're late. The software can also schedule your bill payments to the very last minute, to preserve your capital.

You can also use accounting software to prepare your financial statements. This makes it easier to see what's going on financially with your business, including cash flow. There are other programs and apps you can use to automate other parts of your business, like payroll, to avoid mistakes that lead to penalties and fines, which unnecessarily drain your limited cash.

With cash flow management, a little effort can go a long way. For more tips on how to improve the financial position of your startup, check out the Roll by ADP blog.