Essential Tips on how Startups can Manage Cashflow
Cashflow management is not a function for only big corporations. It is very essential for all startups. According to Dunn & Bradstreet, 90% of small-business failures are caused by poor cash flow.
To avoid becoming part of the 90 percent, you need to maintain a certain respect for cash. Cash is king. Cash is king when it comes to financial management. Always remember cash is king. And in other words, it is not the part of your business that would accommodate shortcuts and sloppy practices. Cash problems have knocked out many companies out of business, big and small.
Here are a few tips to sharpen your cash flow management
In simple terms good cash flow management means identifying all your inflows and outflow of cash and never taking your eyes off this function. So your first task is to list all the sources and outflows of cash to your business.
Document Cash Flows
You must document all your cash flows to be able to track them properly. Do a list or a spreadsheet of all your income lines and your expenses on either side. For example, if you are a blogger, you may have income lines such as adsense ads, promotional articles and ads, email marketing, and expenses like hosting, internet, electricity, wages. Every business has income lines and expenses. Identifying and tracking them is the beginning of your cash flow management.
Collect your Cash Fast
Small businesses try to give extended credit periods to customers with the hope of attracting and maintain customers. This practice can equally kill your business if you don’t pull the brakes on your credit terms. Ideally, it is not even necessary for small businesses to be extending credit to individuals. You can consider giving very short credit periods to big businesses that buy from you. And remember to collect the cash when time is due. Learn the best credit practices and implement them effectively, so you don’t lose cash.
Rather than rushing to pay your creditors, you should buy time, if this is possible. As long as this would not jeopardize the relationship between you and suppliers or providers of services, delay payments to them. This gives you room to be able to turn your money around buy quickly buying and selling or producing and selling (if you have a short cycle), making profits in the process before paying your suppliers and vendors.
Limit Unplanned Cash Outlays
People tend to go beyond their plans for the year. Buying things that you have not budgeted for, simply because there’s an opportunity to buy something cheap can run your business into the ditch. You must resist the temptation to spend spontaneously and impulsively.
Limit Fixed Asset Investments
In one of my articles on why microfinance companies fail in Ghana, I identified heavy fixed investments as one of the major factors. Small entities are paying huge sums to acquire properties in expensive suburbs to run their businesses. This puts pressure on your cash flow, leaving you with very small cash to invest in working capital. And this means your profits would be proportionately small. Remember fixed assets are not earning assets; they don’t generate immediate cash for the business. Limit your investment in them, when you can.
Invest Unused Cash
Be quick to invest all funds you don’t have immediate use for. You can open a call account for this purpose. Call accounts allow you to earn interest whilst giving you the opportunity to withdraw funds when you need it. Idle cash means you are forgoing interest on it and it also tempts you to spend impulsively.
What you do in times of emergencies is not to take a bank loan. Your unused cash in your call account can be used in times of emergencies. You must be careful to distinguish between what is an emergency for your business and what is shire
Season Sales Fluctuations
Fluctuating sales means more inventory is required to cover the ups and downs. Every dollar in inventory is a dollar less in cash available or maybe even two dollars less if your gross margin is 50 percent. Trying to vary the number of employees to match seasonal fluctuations only costs even more cash for hiring and firing.
Managing cash positions is probably not your primary goal for going into entrepreneurship but it’s a crucial part of running a business. At the end of the day, no business can sustain itself without cash.