Startups live and die by their cash. According to a recent CB Insights study of 101 startup failures, running out of cash is the second biggest reason why startups fail, ahead of having the wrong team, competition, and pricing issues.
Cash is Still King. How startups can manage and improve their cash flow
Profit is important, but it’s technically useless if it isn’t in hand when it’s needed. If the value of the company is stuck in inventory, unpaid invoices, and prepaid accounts, then operations can easily be disrupted when the business is short on cash. In other words, timing is everything. To avoid disruptions in growth, it’s crucial for founders to regularly examine, manage, and improve their cash flow by looking at the following.
Monitor all transactions and forecast
Start by having a proper record of all transactions. For invoices issued, track how many days outstanding, and plan around when and how to collect. For invoices received, observe due dates and frequency of recurring invoices. This information will facilitate better financial decisions about profit, loss, and opportunities for expansion. Generally, startups should budget the next 12 to 18 months of cash flow using this information. There are traditional and new cash flow management tools to make this process more efficient, and there’s always Excel.
Understand sources and cash traps
Cash from sales is great, but it’s not the only source of cash for the startup to grow. Startups should identify other cash sources, such as reserve sitting in the bank account, forms of credit, investment, or uncollected invoices. For cash traps, it’s crucial to evaluate where it’s stuck, such as cash spent on unsold inventory or pre-paying for a significant investment that generates cash at a slower pace.
Speed up cash coming in
The more convenient it is for customers to pay, the faster it will be to get cash in the account, so consider integrating more payment options like credit cards, digital wallets, or cryptocurrencies if this is an issue.
Startups with larger invoices should aggregate ones that haven’t been collected and sell them off as a package to invoice factoring services. This won’t get the full amount, but it will get money into the bank right away. The actual amount can range anywhere between 70% to 90% of the initial invoiced amount, depending on how far off these invoice dates are and how likely the buyer can collect them. Lastly, it’s possible to ask customers to pay a deposit, have a retainer, or sell pre-loaded gift cards. Software-as-a-service startups often do this by asking subscribers to pay a full year in advance and offer a discount over paying monthly.
Slow down cash going out
It’s possible to negotiate payment deadlines with certain vendors, suppliers, and landlords. Ideally, set a range of 30 to 60 days from receipt of an invoice, but startups don’t want to push too hard as to maintain a good relationship with them. Agreeing on an instalment plan is a good middle ground, so the cash doesn’t leave all at once.
Alternatively, banks offer working capital loans. However, getting the loan approved will depend on the bank’s assessment of the startup’s current financial status, collateral, and guarantees–all of which can make the process very complicated. Startups can also use credit cards to earn extra time on when cash leaves the bank account, which can be up to 60 days from the payment date. Historically, this was not possible because landlords or employees cannot accept credit card payments, but there are now platforms that enable credit-based transactions. This method allows businesses to use their cash in the ways that make more sense for them, such as to grow and expand.
If you want to know more about cash flow, check our article about cash flow instead of profit.