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Probably the biggest killer of any business is that it runs out of money. Often, it’s not even for lack of a good product, but lack of cash flow. It takes years of experience for an entrepreneur to understand how to manage cash flow well. Money masters and members of The Oracles share their top techniques for staying flush so your business is never crunched for cash.
Build cash up in fat times so you can use it in lean times
In a startup, cash is like food. Your corporation will always need it on hand to live, and when it gets tight, you need to consume less and tighten your belt. A company is never out of business until their cash is gone.
During the market downturn in the early 2000s, many of our portfolio companies died when banks swept their accounts — but companies that held hard cash and no debts were able to simply cut back their head counts and their marketing spend to stay alive.
A startup’s likelihood of success is increased if the company can stay in business long enough for the customers to try out their products and eventually incorporate them into their lives. Understand your cash position, and build it in fat times so you can use it in lean times.
Create a budget and stick to it
The most effective way to ensure your financial reserves never run out is to create and manage a detailed budget for all business expenses, and stick to it. It may seem elementary, but so many new entrepreneurs overlook this simple strategy.
To set your budget, gather all your company’s financial data, including your business’s total income and monthly expenditures. Include fixed and variable expenses and any other additional costs. Taking the time to review these expenses will also help you see where you can save, price-shop services, and see if you’re overpaying for anything. Chances are that you are.
By making a few adjustments to your monthly spending, you will save dollars and be more prepared. If I’ve learned anything in business, it’s to expect the unexpected and be ready for it.
Be mindful of your personality
I’ve found there are two types of people in business: Business Amplifiers™ and Business Synthesizers™. Amplifiers love to gamble, take risks and spend money lavishly. Synthesizers filter information slowly and meticulously with laser focus, executing at a snail’s pace — as if walking a tightrope with their strategies frugally, causing them to miss opportunities.
With clients, the first thing I do is decode their business personality; remember, both are valuable but too much of one can destroy your cash flow. Know your outcome with the utmost clarity. Take appropriate, timely action while balancing both personalities. And don’t stop until you achieve it.
These steps will also ensure sustained cash flow. One, spend your money wisely that leads to more sales. Two, outsource what you can so you focus on acquiring more cash flow. And three, invoice regularly.
Start lean, hire believers and focus on growth
Imagine being a founder who just got funded $50 million. Within a year, you get a message from your finance executive saying you’re running out of money. The organization just spent a whopping $50 million in 12 months with less than $1,000 in revenue made! This is what I regularly deal with when working with founders and startups.
My advice to them is to start extra lean and hire generalists over unicorns. Also, hire believers over talent because they help your company grow.
If you’re strapped for cash, don’t be afraid to think outside of the box. I was working with a company that was struggling because their product wasn’t performing. I came up with a product that had nothing to do with the company, but it was trending.
We sold more branded cereal with a unique pancake flavor than the original product! This tactic also bought our engineers the time they needed to improve the original product offering.
Maintain your marketing budget and get creative
The first thing people do when cash seems tight is to cut costs; those cuts can’t come from your marketing budget. Taking money away from marketing might help the cash problem this month, but it creates an even bigger problem next month when there are no new clients. I learned this the hard way.
If you’re running out of cash, the best thing to do is to keep the pipeline flowing and re-allocate more of your budget into proven marketing platforms to generate business. When I did this, my squeeze was only temporary.
Don’t be afraid to get creative when bootstrapping. I once went through all my belongings and sold anything I didn’t need to boost my marketing budget by a few thousand dollars. It was enough to get my company rolling again. When in a crunch, be smarter about your spending, and don’t ever cut off your business’s life source!
Know your numbers
Not knowing the numbers is the main reason people run out of money. Know your main KPIs (key performance indicators), and monitor them to accurately gauge how well you’re doing. As someone in the call-center business, labor cost is our main KPI. When we’re over a certain percentage, we know we’re losing money and dipping into margins.
Also, manage clients with an escrow up front, shorter payment terms or a deposit to lower your risk. One early mistake I made was extending longer payment terms (60 days) to a company that was scaling their seasonal business. Once their season was over, they didn’t pay, which we had to pursue legally.
A 13-week cash burn report is also useful for managing cash flow. This tool allows you to monitor cash flow weekly and make deliberate trade-offs based on what needs to be paid off that week and what can be pushed.
My last recommendation is to have a good relationship with your bank. A line of credit with your bank against your receivables or a personal guarantee is very helpful in a tight situation.
Don’t just make money, manage it
Many people make money, but very few manage it, and that’s the key to financial success. If you want to be a money master rather than a massive mess, take the advice of someone who’s learned these lessons the hard way; it could save you years and fortunes.
One, pay your bills on time. The universe runs on hard karma, so do unto others as you’d have them do unto you. Sounds simple, but it works.
Two, when you’re flush, banks like you. Apply for an overdraft but don’t touch it. Use in emergencies only.
Three, put 10 percent of every dollar you earn into savings. If you’ve done this for 10 to 20 years, you’d have no cash flow problems. No excuses — do it. (Thank me later).
Finally, pay yourself first. Wealth attracts more of itself, as do poverty and desperation. When you feel strapped, you get emotional, and you make poor decisions quickly. If you work hard for nothing, you’ll lose heart, and your heart is what makes your business thrive.
Originally published on Forbes.com. ©2018 by Forbes Media LLC. All rights reserved.