Startup Cash Flow Management

Startup Cash Flow Management: One of the most frequent bits of advice to new entrepreneurs is, “Remember, Cash Is King!” However, if you let those words dominate your startup thinking, chances are high that you will go bust sooner than you think! Many advisers stress the financial aspects of starting a business—and while I agree that it is vital to startups, there are many other things that are vital too, like why you’re going the entrepreneurial route in the first place, what culture do you intend to cultivate among colleagues, the outcomes you plan for customers to expect—to name just a few.

Keeping cash flow positive is obviously key to survival, especially at the early stages of the business. If cash goes negative there will be a limit on how long a bank will continue support the business. Borrowing possibilities will also be limited, unless there are sufficient assets to back up the loan, though that will tend to be unlikely, if the company is cash negative over too long a period. If cash runs out, how will you pay staff and suppliers, for instance.

If the negative cash flow is temporary, say due to seasonal fluctuations in the market, then a business line of credit may be forthcoming, if your underlying business situation looks optimistic, or your track record has generally been positive. Here is some good advice on Steering Clear of Negative Cash Flow: Warning Signs and Solutions.

Startup Cash Flow Management Is Vital

Another piece of startup advice concerns gathering funding before you start. That can be positive, especially where lots of capital is needed. On the other hand if you garner more cash that you really need, then it may induce over-indulgent spending and lull you into taking your eye off the cash flow. Having a fat bank account can induce complacency. I’d recommend the RIGHT amount of initial investment or access to funds to get off the ground, rather than being awash in startup funds.

Maybe it will help you to know that many new businesses have a struggle with maintaining a strong positive cash flow early on. Even if the cash in hand and at the bank looks good now, monitoring the rate of ‘burn’ will help you get a handle on what to do if it accelerates too fast. My first experience had us reaching a point where we could only see a week ahead without tumbling into the red in one of our early months. Sales were strong and we felt hopeful, I still feared the bank might foreclose in a week or so.

Indeed, it was a hiccup, but I took action anyway and called one of our bigger clients and asked if they could settle an invoice a couple of weeks before the date it was due. I was open about the reason for the call and he fixed ‘it’ by speaking with their accounts payable person and sure enough a direct transfer was made immediately. Now, had our product not been good and our relationship well managed, it might not have been so easy.

Keep the New Business Afloat

It is amazing how quickly cash in the bank can dry up, if you are not constantly vigilant. It is a matter of good housekeeping and if you spot a disturbing trend, then you can take action in time, rather than waiting till it is too late to fix. It is vital to do cash flow forecasting and monitor it at least monthly, perhaps more frequently at the early stages of the startup. Take a look at FreshBooks at Venture Founders section on Founder Services. FreshBooks accounting software for small businesses includes many reporting functions including cash flow reports. You might want to look at my piece on Bootstrap Startup Finance as well. It should help you avoid getting into cash flow problems in the first place.

What you need to do is take a strategic view of incoming  and outgoing cash. In other words, it is not enough simply to look at receivables (who is going to paying you what and when), but while doing that, you’ll need to monitor accounts payable (what you are going to be paying your suppliers and when). The outgoing cash may be fixed (like rent and salaries) or variable (like utilities or product components). However important, it sounds like a tedious task.

Happily there are products out there to help you. One I have come across (though not used personally) is Helm and their site is very helpful and supportive. Another is QuickBooks, the bookkeeping software that I used many years ago very happily (and I’m neither bookkeeper not accountant). The piece on the cash flow statement on their website is very very helpful.