Businesses especially in the initial years, need to keep a close watch on their finances. Most startups fail to make it past the first five years not because they do not have great products or quality leaders, but because they run out of money.
Problems related to cash flow can arise due to a number of reasons. You may be securing poor rates from vendors and dealers, mismanaging your receivables or investing in the wrong places.
Cash flow becomes tardy when there are seasonal fluctuations, business pivots or when you reinvest all profit back into the company without providing for operating expenses.
Whatever maybe the reason the best thing that you can do is to prepare and plan ahead for unexpected emergencies.
Running short on cash can lead to difficulty in making payroll, paying vendor dues and rentals, and managing production.
If you are a young startup grappling with problems related to cash flow, then there are several options open for you to get things back on track. Here are a few of them.
1. Manage Receivables Smartly
Receivables are the lubricant that ensures your business functions like a well-oiled machine. And you can never consider accounts receivables as revenue until and unless your debtors actually clear their dues.
Raising accurate and timely invoices, tracking client payments, following up with delays and sending regular reminders are all part of effective receivable management practices.
Always send invoices on time and stick to an invoicing schedule, where you and your client are on the same page. You can also automate invoicing and choose from among the many billing and invoicing software available. Free invoicing software like Wave and FreshBooks Invoice Generator can be customized to suit your unique needs and can improve your invoicing process massively.
You can also encourage early payments by incentivizing upfront payments. You can offer discounts to customers who pay quickly after invoices are raised or pay fully upfront. Large bills often get delayed, but you can minimize the cash crunch by securing down payment or partial payment quickly.
2. Prepare for Pivots and Emergencies
Pivots and emergencies can result in erratic cash flow. If you haven’t foreseen a major product pivot or business emergency it can lead to poor or almost non-existent cash flow. Product or service pivots result in slow sales and market instability which impact cash flow considerably.
A host of other factors also affects cash flow. If you have a major equipment breakdown or there is difficulty in procuring raw material then production will take a hit. This will have an adverse impact on cash flow where you cannot get finished products to the market. You may also need to invest in repairing or replacing faulty equipment which is again a big capital expenditure.
Other business emergencies include natural disasters, product recalls etc.
Financial advisors say that you need to set aside at least six months of operating expenses when you set up a business. This will help you weather poor cash flow months without major hiccups.
3. Consider Ways of Raising Money
You need not stick to the tried and tested, and traditional ways of raising money for your business.
There are many methods available that allow you to raise money without diluting your equity or taking on unnecessary risk.
Experts say that most companies never receive VC funding, and very few qualify for grants and financial aid. The primary reason is that you do not have an established revenue stream in place and it is very hard to convince investors when they cannot see you selling.
Merchant cash advance – This is a relatively cheap and easy way to raise money. You need to have a merchant account or must provide digital payment pathways for your customers. The service providers will give you a cash advance against estimated future card sales receipts. You pay back the loan from a portion of future sales and you also pay a fee for the cash advance. The application process requires little or no paperwork, and has a quick turnaround time unlike traditional loan processes.
All that a young business needs to access merchant cash advances is a credit card processor, and you can also drive a good bargain with the provider if you have a consistent and good history of at least one year with card sales.
Charge cards – Credit cards have very high rates of interest on cash loans and if you cannot pay on time the loan can snowball into a huge amount.
The difference between a charge card and a credit card is that the former does not allow you to roll monthly outstanding balance to next month. You have to pay back in full within one month and there is no interest accrued on the loan amount either. If you do not repay in a month you will have to pay a fee to rollover to the next month.
Also, the spending limit is quite flexible and generous in a charge card. There is no pre-determined spending cap which you cannot exceed and this feature makes charge cards very attractive to small businesses waiting to get paid by customers.
Charge cards also allow you to build your credit history, albeit in a slightly different way from credit cards.
Leverage personal assets – Contributing a fair share to the business from your end ups the credibility and dependability of your business, especially in the eyes of investors and lenders.
You will have to furnish collaterals when applying for a loan and a substantial collateral in many cases will help you get fairer repayment terms and interest rates.
You can also use idle money like your gold and precious jewelry to fund immediate needs of your business. Reputed gold dealers give really good resale value for gold jewelry. Gold is highly liquid and can help you tide over periods of lumpy cash flow and poor sales.
4. Invest in Human Capital
In the whirlwind on multi-billion valuations, VC funds, blockbuster launches and million-dollar paychecks, most startups forget to focus on the most valuable investment of all – human capital.
Make sure that you have enough time to mentor and empower your employees. A talented workforce is a startup’s biggest strength, and it is what gives your company the ‘potential’ to earn big money.
Ensure that you hire and train the best, and provide them with the best platform to deliver. Incentivize and reward good work, and acknowledge quick learners. Plough back a portion of your revenue into building good HR policies and practices.
Very soon you will realize that your startup is a baby no more but a powerful company with employees capable of taking it to the heights you have dreamed of.
Running a startup means making a series of financial decisions that have the power to change the financial fortunes of your company. Stay aware and educated, and take help when required to tide over the tough initial months or years. An experienced entrepreneur or a trusted friend can take on the role of mentor and act as a sounding board to your ideas. Entrepreneurship is freedom and power, and if you use them sensibly there is no limit to how much you can grow and achieve.