Every startup knows the thrill of landing a big client or seeing sales soar. But what about the times when money’s a bit tight?
Poor cashflow management is one of the leading reasons why startups fail, but there are proactive steps you can take to avoid becoming one of the statistics.
Let’s explore why this is, and how you can keep your business cashflow positive.
Why is cashflow so vital?
Cashflow is essentially the heartbeat of your startup, ensuring everything moves and functions fluidly.
Let’s explore its importance.
Cashflow vs profit
Profit, the money you have after deducting expenses from revenues, is undeniably important.
But, profits on books don’t always reflect in your bank account. For instance, if customers delay payments, your actual cash could be much less than your recorded profit.
This is where the true essence of cashflow comes in – it indicates the real-time money available, ensuring you can meet expenses.
Ensuring operations run smoothly
With a consistent cashflow, you can settle bills, manage payrolls, and cover rents promptly, ensuring no operational delay.
Moreover, robust cashflow means you’ll have money available when needed, e.g. to pay for equipment, contract for jobs and services, or cover emergency expenses.
What happens when cashflow is overlooked?
So, what happens when cashflow is ignored? In 2023, one survey found that 88% of businesses that went under did so as they didn’t look after their cashflows, which is one of the chief death knells for budding startups.
Operational hiccups
- Delayed payments: Inconsistent cashflow can lead to late payments to staff or suppliers, causing potential disruption in delivering services or products.
- Supply chain disruptions: A break in your supply chain might occur if suppliers aren’t paid on time, leading to operational delays and potential revenue loss.
Growth limitations
Your ambitions to expand can be severely constrained without adequate cash.
Whether launching a new product line, hiring more talent, or upping your marketing spend, all require capital, which stems from healthy cashflow.
Reputational damage
- Payment lags: Regularly delaying payments might tarnish your reputation. Over time, suppliers might demand advance payments, or clients might start second-guessing your financial stability.
- Eroding stakeholder confidence: Constant cashflow issues can cause stakeholders, including investors and partners, to lose confidence in your venture’s stability.
Loan-related complications
- Loan approval: Inconsistent cashflow makes securing loans challenging, as lenders seek assurance of regular income for repayments.
- Unfavourable loan terms: If approved with irregular cashflow, you might get slapped with higher interest rates, making borrowing more expensive.
While profits are essential, ensuring a steady cashflow is pivotal for your startup’s smooth running and growth.
Monitoring your cashflow
Grasping the significance of cashflow is half the battle. Implementing monitoring strategies to ensure you’re always in control is the other half.
Regular checks are a must
Consistently keeping tabs on your cashflow is paramount.
- Weekly or monthly reviews: Depending on the nature and scale of your business, determine whether a weekly or monthly review works best. Regular checks mean fewer surprises and more control.
- Real-time reporting tools: Leverage modern accounting and financial software with real-time updates. This way, you can instantly see the effects of a big sale or an unexpected expense.
The power of forecasting
Understanding what lies ahead can save you from potential pitfalls.
- Assess upcoming expenses: This isn’t just about regular bills. Factor in planned investments, expansion efforts, and seasonal changes.
- Project incoming cash: Consider contracts in the pipeline, expected sales, and other revenue sources. Comparing projected inflows against outflows will help highlight any potential shortfalls.
Maintaining a lean operation
For startups, every penny counts.
- Prioritise spending: When it comes to business spending, ask yourself, “Is this purchase going to help generate more revenue or enhance operational efficiency?”
- Regular expense audits: At regular intervals, review all your expenditures. Can any costs be cut? Are there more cost-effective solutions or vendors?
Safety net: building a cash reserve
Unexpected situations are inevitable in business.
- Emergency fund: Just as individuals should have rainy day funds, businesses need a safety buffer, too. It’s your go-to resource when faced with sudden financial challenges.
- Determine reserve size: The ideal reserve size varies depending on your business type. Some might be comfortable with a month’s worth of expenses, while others might want a cushion for a quarter or more.
Need a helping hand?
Cashflow management doesn’t always come as second nature, especially when you’re juggling countless other startup tasks. But remember, you don’t have to go it alone.
With expert help, startups can fine-tune their cashflows and optimise towards success and growth.
If you’re serious about securing your startup’s future, getting expert advice on cashflow management is a game-changer.
Contact us for cashflow management advice.