Starting up a business and smoothly operating it requires a lot of attention and dedication. You have to figure out many things, such as where to procure raw materials from, the cost of production, waste management, marketing, and a long list of other things.
Whether you plan to manufacture a product or offer a service to the market, the business aspects mentioned above are essential to cater to. Your marketing plans must be sound, and your business must have a competitive edge over other players existing in the same niche. But above all, and arguably the most important thing for any business is maintaining a steady cash flow.
Earning revenue is a vital goal for any business, and every business person wants to reap the benefits of profitability sooner than later. However, startups often struggle with their cash flow for multiple reasons. They do not know how to increase their profits or cut down on unnecessary business expenses. Poor financial management and decision-making inevitably lead to the business suffering heavy losses.
Cash flow management plays a significant role in keeping a startup afloat. Following are some of the best tips to help you out and keep the cash flowing as smooth as water:
- Calculate the break-even point
Knowing your break-even point is a must! Your break-even point will not directly impact the cash flow. However, it will provide you with a roadmap to allocate funds in the right place. It will help you increase your income and identify business areas that do not require an investment. You will have a clear vision about your goals and objectives that you need to achieve, helping you invest accordingly.
Your break-even point is where your total business income meets the cost of goods/services you sell. Knowing this point will help you precisely identify how much you need to sell to generate a profit. This information will help you determine how much cash you need to keep your business running.
- Manage the finances properly
Regardless of the volume of your profits, keeping an eye on cash flow management is something you cannot ignore. Your profit and break-even point will determine the criteria to set goals and milestones. However, it would be best to operate the business while keeping your cash-flow and spending in mind. If a company is making profits while not keeping a check on cost leakages in other business operations, your earnings will decrease rapidly. Here’s where skilled management comes into play.
Managing business finances can be a complex matter, and often entrepreneurs underestimate the stakes. It would be a wise idea to hire a seasoned accountant or financial expert to do the job. However, if your startup does not enjoy that sort of financial liberty, consider investing in and up skilling yourself to understand the role if not fully take it upon yourself. Many virtual universities offer smart choices, such as an online masters in accounting no gmat that are handy in getting just the right amount of knowledge to prevent your ship from sinking due to poor cash flow management.
- Maintain a cash reserve
Without a cash reserve, things can get pretty dry, pretty fast. No one can guarantee whether your business will always see a positive side and keep on growing or not. Many times shortfalls arise even when you have planned everything out to perfection. Take a look at the current pandemic, for instance. Numerous businesses shut down worldwide because people suddenly stopped buying products and services from them. Did anyone ever foresee such a thing? No!
In such an instance, your cash reserves come in handy. Maintaining a cash reserve will help you through times of economic crunch. It will give you a temporary financial cushion and enable you to keep your focus on your business objectives and milestones.
- Collect receivables
Many businesses operate on credit terms – good credit terms, to be more precise. However, you can’t let people take advantage of a cordial business relationship. You need to set a policy for your creditors, determining a particular payment cycle that works for both of you.
Your receivables constitute a significant chunk of your cash flow. Collecting them on time will help maintain the cash flow, as pending receivables are a barrier to your business growth. A smart way to go about it is entrusting a responsible employee to manage their timely collection.
- Offer discounts
In continuation with the pointer mentioned above, you can always offer your creditors exciting discounts to make the payment cycle more manageable. This way, they are bound to pay up early. We all love a concession; therefore, your creditors will prefer to pay up before the due date to benefit from the discount. For instance, you can offer a 5% discount if they agree to pay on a cash basis right at the spot.
- Extend payables
Similarly, you must try to extend the time to pay off loans and other payables. The effective way to go about this is to set up a policy when entering a contract. If possible, try to pay up within 60 or 90 days. This will allow you to manage your funds and allocate them properly. It will also enable you to maintain healthier cash reserves for day-to-day business operations.
However, never default on your payables. No one likes doing business with a crook!
- Smart hiring and spending
Hiring is a significant business cost and one that can have a drastic impact on your cash flow. Every month, you will draw money from your cash reserves to pay salaries, and if you’ve made poor hiring decisions, that money is effectively going to waste. As a pro tip, invest in hiring human resources smartly.
As a startup with limited resources, you should only hire an employee if you really need one. Smart hiring also entails hiring people who can multitask till your business grows to a point where there is plenty of cash and lots of work to do.
- Get smart with tech
You cannot survive in the market if you do not utilize modern technology and incorporate it within your business operations. This also includes incorporating relevant Fin-tech to manage your cash flows, accounting processes, and tax compliances efficiently. Recording your data onto spreadsheets and cloud storage will allow you to manage your business most proficiently. Human errors can be costly, especially in the early stages of a business. Imagine the dent in your cash flow if one of your employees fails to keep a proper record of paper receipts and eventually misplaces them. Disastrous, we say!
We have seen that many startups fail to operate, and there are many reasons for that. However, the most common cause is not managing your cash flow properly. You cannot ignore cash flow management when it comes to operating a business smoothly. Incorporating these tips will ensure that your pockets are never run dry of cash when you need it the most.