New start-ups should fully understand that running out of money is one of the primary reasons businesses fold shortly after a launch. This scenario is a proven statistic.
However, start-ups can avoid joining the ranks of failed companies by being smart about how they spend their start-up 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 growing in the direction of profit by following these 7 tips on how to manage your start-up’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.
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 start-up capital along the way, and you’ll 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 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.
3. Always maintain a cash reserve.
Every start-up 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. It allows you to stay focused on growing your business.
4. 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.
5. 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.
6. Spend only on essentials.
Part of your forecasting model should give you a decisive view of the necessary expenses 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.
7. 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.
Flex Capital offers Invoice Discounting, Structured Finance and Purchase Order Funding solutions that inject cash flow into your business to you can implement the changes you need to keep doing good business.
The source of this article can be found here.