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The number one reason that most startups fail is because they are creating a product no one wants. The number two reason for failure? They simply ran out of cash. With 90% of startups facing doom, these are serious threats every company should consider.
When a company grows too quickly, doesn’t grow quickly enough or mismanages their spending, they run into big problems. Poor spending choices or failure to get capital will result in the inevitable end of a company. Learning how to manage cash flow, then, is important to keep a company afloat and work towards a profitable outcome.
1. Determine Your Breakeven Point
You need to know what it will take to be a profitable business. This does not directly affect your cash flow, but it does give you a goal to strive for and help you project future cash flow. In order to keep the positive cash flow around, you will want to have a hard number settled and then reach that goal every quarter. Knowing your breakeven point is important for setting up your budgets and planning out your cash inflow needs.
2. Focus on Cash Flow Management Over Profits
Setting a breakeven point does not mean you should put your primary focus on profits. You need to be more aware of good money management and cash flow practices than creating profits. Your breakeven point becomes a marker to help you manage your cash flow and keep your head above water. You want to become profitable, so you need to know you are pulling in dollars above your breakeven mark, and then manage your cash accordingly.
3. Record Carefully
Not only is it important to keep track of your cash flow for a better tax season with fewer bumps, but you will want to keep records to monitor your budget frequently. Look for ways to reduce unnecessary spending in order to lower your breakeven point. Keep eyes on where money is being spent at all times and don't just assume your team is spending within the budget. You will also use your records to see what is causing higher or lower cash inflows and outflows in your business, helping create better projections moving forwards. A cash flow worksheet is a very helpful tool to see exactly where your money is going to and coming from each month.
4. Have a Backup Plan
You will want to have additional stores of money in case of an emergency. No matter how well you plan out your budget, unexpected events may come along, throwing everything off and destroying even the best cash management system. A contingent cash source can help keep you out of hot water when difficult times arise, allowing you to operate business-as-usual until things get settled back down.
5. Delegate Receivables
Don’t wait for receivables to meander into your cash flow. If possible, delegate the billing task to a trustworthy and persistent member of your team and keep tabs on your customers’ accounts. Avoid net-30 and net-60 terms in contracts if possible. You will not be able to manage your cash flow properly if you can not count on a steady inflow of cash to work with. You might even offer early payment discounts to customers who are willing to hand over cash upfront. You should also have a pre-written set of standards to determine who is eligible for credit so not every customer is pre-approved for a credit line with your company.
6. Extend Payables
You never want to make late payments, but look to create contracts that are net-30 or net-60 in order to get the best deal on your payables. Pushing back payments with your suppliers will help you have additional cash on hand to work with – provided you aren’t racking up late fees or burning bridges.
At the end of the day, startups shouldn’t depend on a sole founder without a partner. There has to be someone to help keep you on track with your planning and keep a second pair of eyes peeled for potential sinkholes. Keep the cash flow strong by following best spending, billing and investing practices and your company will be on a good path towards success.
If you need help preparing a cash flow statement, or with any of your business accounting needs contact us at (513) 713-1152 for a convenient appointment.