New startups should fully understand that running out of money is one of the primary reasons that businesses fold shortly after a launch. This scenario is a proven statistic, but startups can avoid joining the ranks of failed businesses by being smart about how they spend their startup capital.
And that’s crucial: Trying to run a business without carefully managing cash flow is like trying to paddle upstream without an oar: you’re not likely to make it to your destination. Even if you do, you’ll be so exhausted you won’t have the strength to go on.
So, instead, take steps to ensure your business will be healthier. Make sure you’re rowing in the direction of profit by following these 10 tips on how to manage your startup’s money.
1. Know when you’ll break even.
Knowing the point at which you’ll break even won’t necessarily impact your cash flow, but it will give you goals to strive for and a ready-made target for forecasting where your cash should go in order to reach that goal.
If you focus on that goal, and the milestones you have to hit to reach the break-even point, you’ll be smarter about how you spend your startup capital along the way, and will budget accordingly.
As Tony Hsieh, founder of Zappos, says, “Chase the vision, not the money. The money will end up following you.”
2. Keep your eye on cash-flow management.
You need to avoid focusing too heavily on profit. While that may sound like a contradiction to my first point, it’s far from it. You look at your profit and break-even point in order to set benchmarks — but you still need to maintain focus on cash-flow and spending. That doesn’t change just because you cross over into profitability.
“Every month isn’t enough,” says Derek Flanzraich of Greatist. “Nearly every week I’m checking both my personal and business finances.”
3. Always maintain a cash reserve.
Every startup should expect shortfalls. They happen to everyone, even with the best plans in place. But your survival likely will depend on how you traverse those shortfalls. Having cash reserves for those lean times lessens the blow, the stress and the distractions, and allows you to stay focused on growing your business.
4. Manage funds better.
Unless you absolutely have to (which is rare), you shouldn’t handle the money for your business. That includes tracking it and handling your accounting. Hire an accountant or CFO to tackle this task for you. If you can’t bring on the extra help, designate a trusted employee to be a cash-flow monitor.
You can simplify this process by using a service and software platform like InDinero.com, which provides accounting software to make cash management easier. The service also provides access to accountants, CPAs and tax specialists who will work diligently to help your company grow. Having access to tax specialists is especially important to your cash flow, since they’ll make sure you stay on track with deadline dates for filing your business tax returns, to avoid penalties and interest.
5. Collect receivables immediately.
Try to make any invoices “due immediately” and limit the use of net terms longer than 15 days. If you can do so, delegate the task of keeping an eye on receivables and customer follow-up to get money in as quickly as possible.
6. Offer discounts to collect payments earlier.
If you don’t want to wait for normal net terms to pay out, then offer your customers a discount if they pay early. If employees are dealing with collections, then make sure you have guidelines that state their eligibility for discounts; and then enforce those standards strictly.
7. Extend payables where you can.
While you want to bring payments in as quickly as possible, work with your suppliers and vendors to get the best deal you can and extend payables to net 60 or more, if possible.
8. Spend only on essentials.
Part of your forecasting model should give you a strong view of the necessary expenses that are coming down the pipe. Outside of the most essential purchases, you want to minimize spending and eliminate costs that aren’t essential to your operation until you’re profitable.
9. Be smart about hiring.
I often see advice in this area that says something like, “Don’t hire until you absolutely need to.” That’s fair advice to a point, but I’m more apt to recommend smart hiring. If you can recruit top talent, a highly skilled worker is likely to be able to tackle the work of two or more mediocre employees.
You’ll probably spend a little more in salary or benefits to get that top talent, but that amount is still bound to be less than you’d spend on multiple employees covering the same task who make more frequent mistakes.
Another outcome is that they may quit on you, forcing you to start over. According to the University of California-Berkeley’s Institute for Research on Labor and Employment, it costs an average $4,000 to hire an employee. So, be smart about whom you recruit if you must hire someone.
10. Make the best use of technology.
Always back up your files and cash-flow spreadsheets, to secure cloud storage. Not only will this keep your data secure from local file corruption or data loss/theft, but it will also make it easier for you to gain access from anywhere you have an Internet connection.
This is another situation where accounting software can come in handy.