Start-ups often fail because they run out of cash in the first year. The reason for the cash shortfall is not always that there was not sufficient capital in the business. Often new companies run out of cash because of a lack of cash flow management.
A new business has no history on which to base financial predictions, so budgets and cash flow forecasts are less reliable than they would be in an established company. Because the estimates will be less reliable, there will need to be tighter control on expenditure. However, so long as there is a pot of start-up capital sitting in the bank, the temptation will be to spend it. Here ten tips to help you ensure that your start-up cash lasts you through the first year and beyond.
Keep Your Cash Flow Forecast Updated
Because your cash flow forecast will have involved an element of guesswork, you will need to update the figures regularly. In effect, you will need to have a rolling cash flow forecast that adjust to reflect your latest income figures and expenditure. To keep the cash flow forecast up to date, you may need to revisit your projections weekly, or at the very least, monthly.
Keep Your Accounts Up to Date
You will need to keep your accounts up to date as well so that you can monitor how you are doing against your initial budget. A monthly review of your accounting variances will tell you if the businesses on track, and your monthly accounts will tell you if you are overspending in any expense categories. It is essential in a start-up situation to be flexible with your plans. If you do not hit your sales targets, for example, you may need to rein in your spending. So, like your cash flow, your budget may need periodic revisions.
Know Where Your Breakeven Point Is
Analyze your budget to ascertain your breakeven point, which is the volume of sales that you will need to cover all your costs. The breakeven point is the most crucial target you will have to hit for the first few months or first year. If you are not breaking even, you will be eating into your cash reserves. So, if you do not break even in line with your projections, you will need to cut back on costs.
Stick to Your Budgeted Expenditure
Use your budget to guide you on what you spend and flex your budgeted expenditure to reflect lower sales if needed. Any time you are considering making a substantial purchase, check first that you have the budget available to do so. Costs will need to be tightly controlled if you are to stand any chance of making the profit that you had initially projected.
Negotiate Terms with Suppliers
Negotiate terms with every supplier. If you can shave a few percent off any purchase, it will give more leeway should sales fall short of projections. Try to negotiate on payment terms, too. Getting 30 days’ credit on a purchase keeps that cash in your bank account 30 days longer. It would also be a good idea to pay vendor invoices as soon as they are due and collect any available settlement discounts. Keeping suppliers sweet in the early days may help you get extended terms later if you find yourself short of cash.
Keep Back a Cash Reserve
You can expect a few shortfalls with any start-up. Shortfalls could happen because of lower than expected sales or unexpectedly high costs. So, it is advisable always to keep a reserve of cash tucked away in a separate bank account to cover yourself for such emergencies. You can virtually guarantee with any new business that something in the original forecasts will not go as planned. But if you keep your cash reserve intact, you will be able to survive the setbacks.
Keep on Top of Your Receivables
If you are selling goods or services on credit, it will be crucial that you stay on top of your receivables. Be careful to whom you give credit, and keep credit limits low until you are confident that the customer will pay. Raise sales invoices as soon as they are due, and chase for payment as soon as invoices become due. A significant bad debt in the early days of business could be a disaster.
Be Wary of Hiring Staff to Soon
Try to avoid hiring staff until they are needed. If you can, use freelancers and contractors to carry out work for you until your business has become better established. Freelancers may be more expensive in the short-term. But employees are a fixed overhead that must be paid, even if you have a month of low sales.
Make Every Cent Count
When you are managing the finances of a new business, you will need to make every cent count. Remember that your budgeted expenditure is not a target to be aimed for; it is a maximum spending limit. So, aim to come in under budget on as many cost categories as you possibly can. And consider how every item that you buy contributes to the business. In other words, if you don’t need it, don’t order it!
Don’t Let One Good Month Go to Your Head
Managing the cash of a start-up is all about prudence and caution. You may see significant fluctuations in your sales in the first few months. But do not take it for granted that one month of high sales marks the turning point for your business. If you do get one exceptionally high month of sales, transfer the extra cash you earn straight into your cash reserve. You never know what is around the corner when you are running a start-up.
The main takeaway from the above is that prudence and flexibility are essential when you are managing the cash flow of a new business. You will need to adjust your spending to match your income, and it would be advisable always to keep some cash in reserve. If you keep your eye on the ball, your business shouldn’t become one of those that fail in the first year due to poor cash management.
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