Having a good business model is essential for any startup. But to make it work, you have to maintain a certain reverence for cash. If you can’t manage your cash flow, your business may not survive at all.
Based on a study, poor understanding and management of cash flow are the reason why small businesses and startups don’t succeed eighty-two percent of the time. That’s why startup owners need to prevent and fix cash flow issues as early as possible.
Below we will discuss the top cash flow problems for startups and how you can avoid them.
Too Much Spending
Startup companies tend to spend too much in the first few months of business. They often overlook the number of expenses concerning their product’s pricing. While it’s true that you need to spend money to make more money, going overboard can put your business in a cash flow hole.
Note that not all startup costs will benefit your profit margin. Overspending on items like office equipment, software, and business lunches can quickly add up. They can get you started on the wrong foot, causing a delay on your break-even point.
Even the most established companies experience low cash flow due to fluctuation in sales. It’s even more so if you have a seasonal business, such as the travel or tourism industry. For instance, weather conditions can significantly impact these business operations. Sales would usually go slow during the winter months.
In such cases, you may have to put more money to stay afloat until sales pick up again. That won’t be a problem if you have a financial cushion on hand. Meanwhile, one slow sales month can instantly ruin your business, especially if you’re operating from a zero account balance.
As a startup entrepreneur, it’s typical to provide flexible payment options to your customers. But they can be unreliable in making payments on time, resulting in past-due receivables. Note that you have to rely on getting your cash in return through the sales. This way, you can use the money to move your business forward.
But customers’ delayed payments can prevent your startup from turning a significant profit. Instead of giving yourself the money you need for future business endeavors, you may end up with cash flow problems. Without enough cash at your disposal, paying your bills on time would be more difficult.
How you source and manage inventory affects the cash flow your business generates. Too much inventory can make it hard for you to sell fast enough to pay for the cost of purchasing and storing.
To cover the expense of surplus inventory, you’ll have to use the available cash on hand. Meanwhile, insufficient inventory will keep you from meeting customer needs and demands.
Rapid Business Growth
Every entrepreneur wants to grow their business. But to do so, they need more cash to deliver products and services as well as build facilities and pay more staff. Such costs can’t wait for your sales and revenue to keep up.
So if you don’t have enough cash to hold you over, rapid growth can only hurt your cash flow and your business in general. Remember that it can take time to establish a profitable business.
How Can Startups Avoid Cash Flow Problems?
You can only succeed as a startup if you take good care of certain aspects of your cash flow. Here are some tips to avoid cash flow problems.
- Create A Cash Flow Forecast. You need cash to pay your bills and overhead costs. So creating a cash flow forecast is essential. It will help you find out if you’re going to run out of money. This way, you’d be able to prepare ahead of time.
- Cut Unnecessary Cost. It’s easy to overspend on your startup business. To avoid a negative cash flow, reduce any unnecessary overhead costs. Doing so can make a long-term difference in your cash flow. Look at your expenses and the entire workflow process, then determine areas where you can save money. Also, ensure to back your spending with your earnings.
- Have A Credit and Payment Policy. Late or unpaid sales invoices can result in a serious cash-flow problem for startups. It’s okay to give your customers flexible payment options. But to speed up your cash receivables and increase your cash flow, put a credit and payment policy in place. This will help keep your customers accountable.
- Stay On Top of Inventory. Too many unsold inventory items can increase unnecessary costs. To make sure you have liquid cash available to pay your bills, stay on top of inventory. Monitor current stocks and only request orders if it’s necessary. It’s also best to identify your off-season so you won’t end up storing more than the demands.
- Seek Business Financing. Applying for financing like creditninja.com digital loans can be a lifesaver for any startup to bring more cash flow in quickly. But since it always involves interest rates, make sure to borrow only what your business can afford.
Cash flow problems can occur even in the most favorable business environment. But the key is to be proactive and take financial considerations seriously before even getting started. Besides creating a good business model, make sure to have a lineup of a financial cushion you can tap at any time.