Cash Flow Management for Startups

Entrepreneurs know they must monitor their business’s cash flow. Spreadsheets abound to enter every income and every outlay so they can keep track of their progress (or decline). But cash flow and its impact on a business are not just about math. The numbers mean something, and you need to know what you’re looking for when you peruse that sheet at the end of the month, especially during startup. Even more important, you need to know how you got there.

Spend Wisely

A simple first rule: Spend as little money as possible, especially in the startup phase. Before buying any item beyond a certain price, say $100, ask yourself if the purchase is truly necessary. If it isn’t, don’t buy it.

It’s best to make due with what you’ve got. For many startup entrepreneurs, this reminder is particularly relevant with respect to technology. You don’t need the souped-up computer, oversized flat-panel monitor, or high-tech phone. You need to hold on to as much cash as possible during startup to ensure you’ll have enough money to pay your suppliers and overhead. Don’t blow your startup capital on anything flashy that isn’t vital to the success of your business.

When establishing cash flow projections, talk yourself out of the inherent optimism in your venture. The saying “expect the worst and you’ll never be disappointed” applies here. Overestimate your costs, and underestimate your income going forward. Why take this perspective? Because if your cash flow in the worst-case picture is still manageable, you will be ahead of the game in a normal scenario.

Cash flow should be updated regularly as you realize the differences between your projections and reality. Some experts say weekly updates to cash flow data should be a regular part of your business routine, particularly for the first six months to a year in existence, and during serious economic downturns. Beyond that, once you have a history to gauge your projections on, a monthly update to your cash flow should be sufficient. This means you need to be consistent in how you’re going to set those figures and stick to that every month. If instead of an expected 20 percent revenue growth a month you decide you use 10 percent as your worst-case, then do that every month. As long as your cash flow data is measured consistently, you’ll have no issue.

Monitor Your Receivables

Receivables are the main component of cash flow. Therefore, it’s important to be aggressive regarding invoices. As soon as they are late, find out why and pressure the company to rectify the situation. It may sound harsh, and you may fear ruffling the feathers of new clients, but if they believe paying you late is acceptable, you’ll soon be at the bottom of their payee list.

This ties into the worst-case setup mentioned earlier. A portion of your clients will not pay on time. As such, cash flow should be established to assume a portion of late payments. Receiving these payments earlier than expected will be a welcome surprise, but the delays, should they come, won’t put your business in crisis mode (assuming they are short-lived).

An item often overlooked on the cash flow projection is money tied to debt absorbed in your startup. Account for your payback as a steady outlay rather than betting on future profits to cover those repayments.

Now go get yourself one of those spreadsheets, and let the planning process begin.