cash flow

8 Steps to Make Your Startup’s Cash Flow Positive

Cash flow is the lifeblood of any business. Without cash on hand, you will be unable to pay your staff and your bills, invest in growth or buy raw materials to service new customers.

Further, if you think that cash flow problems only affect companies with marginal profitability and poor prospects, think again: as your startup becomes profitable and grows, it is most at risk of cash flow problems and can find itself facing insolvency precisely when it’s on the way to huge success.

Why? Because you’ll need to invest in people, equipment and stock to service new account wins before your new customers pay them.

So what steps can your startup take to protect itself from cash flow crises?

Prepare detailed cash flow projections, not just budgets

What’s the difference between a cash flow projection and a budget? Simple. A budget projects your future income and liabilities in a general way. On the other hand, cash flow projection logs individual payments (both incoming and outgoing), against precise dates.

In other words, while your budget might tell you that you can expect to make a profit, your cash flow projection should be able to tell you if you have cash in hand to meet a particular direct debit since your customers habitually pay on the last day of the month.



Make sure your cash flow projection is realistic

There’s no point in preparing a cash flow if you’re going to be optimistic. If you know that you will have a large direct debit on the 21st, and that your customers pay you on the last day of the month, don’t be tempted to move dates around to hide the problem.

Similarly, if you take on new customers, don’t automatically assume that they will comply with your 30-day payment terms. For all you know, they could take 45 or 60 days to pay, leaving you with a cash void in which you can’t pay your bills.

Always assume the worst when preparing your cash flow; that way, the only surprises you receive will be positive.

Aim to maintain a cash cushion

If your cash flow (prepared realistically rather than optimistically) suggests that there is a crisis looming, you should take steps immediately. If you need to borrow to have a cash cushion on hand, then do so. Paying unnecessary interest is preferable to going out of business.

There are several borrowing options to free up cash flow, ranging from term loans (whereby you borrow a fixed amount over a fixed period) to business lines of credit (acting like an overdraft, whereby you have a borrowing limit against which you can draw down and repay at will).

The latter will generally attract a rather higher interest rate, but offers a great deal more flexibility, and of course, you will only pay interest while you are actually using the facility.

Try to get paid faster

This is the big one: if you can get your customers to pay more quickly, then your cash flow problems could disappear overnight. Overdue invoices are the biggest danger to any company (particularly a company that is growing fast), so you should take every possible step to deal with delinquent payers.

Simply putting in place a firm credit control procedure, with escalating steps on the due date and 15, 30 and 45 days afterwards could make all the difference.

Alternatively, some businesses find that for successful cash flow management, the “carrot and stick” approach works very well: offering a small discount (say, 5 percent off) for payment within a week and adding statutory interest for any payments exceeding 30 days.

Pay your suppliers later

On the other side of the equation, paying your own bills later can give you a huge amount of breathing space. We’re not suggesting that you become delinquent payers yourselves. Instead, your suppliers may well be happy to negotiate new terms of business (45 days instead of 30 or 60 days instead of 45), particularly if new account gains enable you to offer them an increased volume of business.

Equally, if you are capable of putting additional business their way, you may be able to negotiate some very handy discounts in return.

Control your expenses

Reducing your expenses is another very effective way of boosting your cash flow.

If your premises include space that you simply don’t use, you could consider moving to smaller premises with a lower rent. Alternatively, you may well find that changing energy and telecommunications providers can slash your monthly bills. Similarly, keep a close eye on petty cash, as all of those tiny purchases for things you may not really need can soon add up.

Secure some additional business

If you are facing cash flow difficulties, then investing in an expensive marketing campaign is out of the question. But it doesn’t necessarily take a high-profile campaign to build your business: if you have people sitting around idle, get them cold-calling to see whether you can attract some new customers.

But remember: new business isn’t cash in the bank until you actually get paid, and your new customers could well be tardy payers. For this reason, never rely on new business alone to get you out of trouble. You may still need to take the other steps outlined here, including borrowing to create a cash cushion.


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Consider invoice factoring and discounting

Finally, there’s one sure-fire way to tame a troublesome cash flow forever: introduce invoice factoring or discounting. These innovative financial solutions involve borrowing against the value of your invoices, with repayment being made when your customer pays you.

Providers will typically advance around 85 percent of the value of your invoices, the instant you issue them; so it’s like getting paid immediately, with tardy payers no longer able to derail your cash flow.

With factoring, the finance company will assign experienced credit control professionals to secure early payment, thus minimizing the interest you pay. This is particularly useful if you are running a small or overstretched business without a dedicated accounts receivable team, as it means that you no longer need to divert people from revenue-generating activities to chase up invoices.

In contrast, if you have a stable and successful accounts team (or simply dislike the idea of having customers deal with a third party over debts), you can opt for invoice discounting and retain control of your debtor ledger. Either way, the stress of payments coming in late and leaving you without cash on hand will virtually disappear.

Act now or you could find yourself paying later

As we have noted, cash flow problems can strike any business at any time, and profitable and growing companies are particularly at risk.

In business, forewarned is forearmed, so by taking some or all of the steps above you should be able to avoid some very unpleasant headaches down the line.

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