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7 Steps to Managing Cash Flow Better
A well managed cash balance is a key for startup success. Here are 7 steps towards managing cash flow like a pro.
More often than not, startups fail after launching because they run out of money following launch. It is estimated that >80% of startups are subjected to this fate. Yet, despite the evidence often showing cash flow problems, successful startup founders should aspire to manage their cash flow in a pro-active manner.
First and foremost, startups must prepare a plan for their cash flow management. Attempting to start a business without carefully managing cash flow is like trying to drive a car with limited fuel. The car simply isn’t going to get to the next station without a refuel.
In order to manage your startup’s money successfully, here is a step by step guide to ensure you’re driving in the right direction.
Know when your startup will break even
This may not impact your cash flow, but it will give your business goals to work towards and a target when it comes to cash flow forecasting. By focusing on this goal, and recognizing the actions you will have to take to hit it, you can plan your budget in accordance.
Monitor your financials.
At the early stages, it is important to not be too focused on profit, but rather keeping cash burn in check. Check weekly. Make sure you know what money is entering your business accounts and when it is leaving. By maintaining a focus on this, you can be clear about how to improve the impact of your spending.
Always keep a cash reserve.
Shortfalls happen to all startups. Even to the startups with the best plans in place may be struck by an unexpected expense. Regardless, your company’s survival is dependent on how you manage these shortfalls. Having cash on reserve for at least the next 3-6 months can minimise the blow and stress of unexpected expenses.
Unless you have a financial background and can DIY, it is far more efficient and cheaper in the long run to hire a bookkeeper to manage your money for your business. This includes everything from tracking finances & giving you reports, to handling the bookkeeping. It elevates the productivity of your time with someone who has more expertise and ensures you manage your money efficiently and correctly. This reduces your exposure to a lot less penalties or ATO reviews as well.
Try to make invoices due immediately
Getting paid on time is problematic for many businesses and can cause significant problems in managing cash flow. Be sure to make payment terms for receipt no longer than 15 days.
Whilst you will want to ensure money comes in to your account quickly, try to negotiate with your suppliers to make your payables to net 60 days. This gives your business breathing space financially.
Spend on essentials
When it comes to expenses, ensure you are paying for the essentials – particularly in the beginning. Be sure to be ask questions like, “is this necessary right now or can my business manage without this for the moment?”
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, agencies and entrepreneurs.