Cash flow is the lifeblood of all businesses. When starting out, you need enough cash to sustain operations until you secure your first sales. Once you’ve made your first sale, you need enough cash to buy inventory and supplies in order to produce your product or service.
As your business grows, you need even more cash to order more supplies, build a larger inventory and expand operations. Many good businesses have gone out of business simply because they ran out of cash.
Below are seven cash saving essentials to preserve and manage your startup’s cash flow.
Prepare and maintain a 12 month rolling cash flow forecast
Identify where there will likely be cash flow peaks and valleys throughout the year so you can plan accordingly. Keeping on top of your cash flow allows you to prepare for seasonal spikes, take advantage of sudden opportunities and manage through slow periods. Update it weekly.
Evaluate your payment terms
How do your payment terms stack up against your competitors? Are your customers honoring your payment terms? Request down payments from new customers and for large orders. Can you reduce your payment term? Reducing your payment terms from 30 days to 20 days will have significant impact on your cash flow. Do you offer early payment discounts?
Related: Cash Flow vs. Profit
Enforce payment discipline
To shorten days in which sales are outstanding, you need to have good invoicing and collections policies in place. Make sure your customers know your payment terms upfront. Payment terms should be stated clearly on all contracts and invoices. Invoice promptly and accurately to avoid delays, and follow up on late payments. Do not hesitate to cut-off late paying customers. Run credit checks on customers before offering credit terms.
Take a look at your suppliers’ payment terms
Are they competitive? Can you negotiate longer terms? Are you taking advantage of early payment discounts? Ideally, you want to pay your suppliers after you receive payment from your customers.
Segment your customers, suppliers and inventory
Take a close look at your customers and identify priority customers. Priority customers generate the most profit, not necessarily the most revenue. What can you offer them to incentivize them to pay earlier? Identify your worst payers and develop a strategy on how to improve their days outstanding. Decide if they are worth keeping.
Identify critical and non-critical suppliers. Try negotiate better terms with your biggest and critical suppliers. Stretch payments to your one-off and small suppliers when needed to manage cash flow.
Review your inventory and identify items that do not turn over quickly and tie up capital. Can you reduce or eliminate them from your inventory? Consider dropping your bottom 20 percent of profit producing SKUs.
Make cash flow a company-wide priority
Make sure everyone in the company understands your payment terms and policies. Have people dedicated to collections. Measure and compensate sales people not on when a sale is made but when it is collected.
Review your working capital availability
Do you have timely access to additional working capital when needed to finance growth? How will you manage the cash flow stresses associated with growth such as bringing on additional employees, holding more inventory or purchasing more materials? Don’t wait until you are in a cash flow crunch to secure additional sources of working capital. Talk to your banker, alternative lender or financial advisor in advance so you don’t find yourself in a cash flow crisis.