Running a successful startup means being able to manage your finances well. In fact, 82% of small businesses shut down due to cash flow problems, according to the U.S. Bank. These problems may either be poor cash flow management or poor understanding of how it works.
Cash flow is crucial for businesses because it enables you to meet your financial obligations such as debt repayments or keeping up with overhead expenses. Not only that, it helps you identify whether your startup is actually growing, and which expenses in your business are no longer necessary.
Since money is the lifeblood of your small business, you need to keep an eye on your finances. But how do you know if you have cash flow problems? How do you address them?
Understanding what cash flow means for your startup
Cash flow is important to understand because it represents the money that comes in and out of the company. Cash flow can be positive or negative, which means that a company either has more money coming in than going out (positive cash flow) or vice versa (negative cash flow). There are a number of factors that can affect cash flow, such as sales, expenses, investments and borrowing.
Cash flow is important because it allows businesses to pay their bills, make payroll and invest in new opportunities. Additionally, cash flow provides you with the working capital you need to grow and expand. It also allows you to keep operations going while you wait for revenue to come in. Without cash flow, startups would have to shut down very quickly.
What is cash flow management?
As you launch your startup, you may experience having more expenses than revenue. That’s normal because during the early stages of your startup’s growth, there are costs associated with validating R&D, running marketing campaigns, hiring top talent, paying the bills, etc. But eventually, you will have to bring in more money than you spend–this is where cash flow management comes in.
Cash flow management is the process of monitoring, managing and improving the cash flow of a business. There are a number of factors that can impact cash flow, from unexpected expenses to slow-paying customers. That’s why it’s important for you to have a handle on your cash flow, and to put strategies in place to manage it effectively.
How do you know if you have a cash flow problem?
Cash flow problems don’t always look alarming until they become too catastrophic to fix. So before that happens, here are the most common signs you’re not managing your cash flow efficiently.
1. Your customers are not paying on time.
Small businesses are dependent on the money generated from sales. However, this becomes problematic when customers fail to pay on time. With money coming in late, all other areas in your startup would suffer.
WHAT TO DO: Sending invoices to customers early will help you subtly remind them about their payments. When you send invoices early, you give your customers enough time to pay you before it’s due.
2. You are spending more than you earn.
There are a few reasons why spending more than you earn is a bad idea. First, it means that you’re living beyond your means. You’re spending money that you don’t have, and that’s not sustainable.
Aside from that, it can lead to debt. If you’re constantly spending more than you’re bringing in, eventually you’re going to run into financial problems. Lastly, it can be hard to break the habit once you’ve started doing it, and this is a position that’s difficult to get out of.
WHAT TO DO: Make sure you know your numbers–from the cost of making your products or services to running your marketing ads to paying your employees. Also, create a budget and stick to it. Track your spending so you know where your money is going, and make saving a top priority.
3. You pay your bills and creditors late.
Late payments can be a real problem for your cash flow, and if it’s a frequent issue, it can start to put a strain on your business. Paying your bills and creditors late may greatly affect your credit rating, which is important when securing loans in the future.
On top of that, making late payments entail additional late fees or interest, which can add up and make your debt more expensive. Also, paying bills late can create financial stress and anxiety. It gets difficult to sleep soundly at night knowing that you have outstanding bills to pay.
WHAT TO DO: make sure you have a bookkeeper or are using bookkeeping and accounting tools to help you stay on top of your bills and debts. In case you’re having trouble keeping up with your debts, you can always take out a small business loan to consolidate them.
4. You and your employees are overworked.
Do you have a lot of things on your plate and still feel like nothing gets done? One of the primary reasons for onboarding more people in your company is you have experts to work on tasks that may be too tedious and time-consuming in your end. Not only that, you get to free up more time from your employees, avoiding burnout that may result in high attrition.
WHAT TO DO: Hiring more employees can help you free up your workload by putting the right people for the right jobs. Doing so not only prevents employee burnout; it may also result in increased productivity among your team. This also gives you more time to focus on critical aspects of your business, such as growing your customers or managing operations.
5. You’re using your personal finances to cover your business expenses.
Using your personal money for business purposes may be detrimental to your company’s growth. Why? First, it can create a major separation between your personal and professional finances, which can be very difficult to manage. Additionally, using personal funds for business purposes can put your personal assets at risk if the business fails or runs into financial difficulties.
Also, using your personal money for business expenses can send the wrong message to potential investors or lenders, who may view you as less committed to the business’s success if you’re not willing to invest your own money in it.
WHAT TO DO: Always separate your personal and business accounts to manage your startup’s finances better. When it gets tough to cover costs, you always have an option to get more working capital from lenders.
The bottom line
As a business owner, you need to have a clear understanding of your company’s cash flow. A healthy cash flow means you’ll have the funds you need to invest in your business and grow over time. If your cash flow is negative, it could limit your ability to make these types of investments.