11 Smart Cash Flow Solutions for startups

Introduction: 

As an entrepreneur, there are many hats one has to wear. While an enterprise might be conceived with passion, running it and managing the many functions can be a different animal altogether. 
 
And in the midst of managing a start-up, many issues crop up - be it managing people, sales cycles, managing the supply-demand or finance or cash flow. India has the third-largest ecosystem for startups, yet 80-90% of Indian startups fail within the first 5 years of their inception.
 
According to the US Bank, 82% fail as a result of cash flow issues. This means the business had potential, had a market, successful product-fit, interested customers but then it failed - because it suddenly ran out of cash!
 
                                                                                                                                  putting coin in black piggy bank - saving money
 
This is why, in business, ‘Cash is King!’
 

Prioritize Cash flow over Profit: 

While it is natural to want to look at profits, to keep the engine running, entrepreneurs must pay attention to cash flow. 
 
First, to understand the difference between cash flow and profits, let us look at what each of them means:
 
Profits is the amount of money left over after all the expenses have been accounted for, while cash flow indicates the flow of money into and out of the business. 
 
Another way to put it is Invoicing a customer for products or services you sold to them creates revenue. Actually collecting the money on that invoice is what creates cash.
 
But cash flow is not understood very well and is a misnomer in many instances. 
 
                                                                           calculating on phone - cash flow calculation
 
Let us look at an example: If a business ‘A’ has one lakh annual revenue - then it has probably seen 1,00,000INR come into its bank account. But if the same business is not making profits, or is at 0% profits, then the business has seen 1,00,000INR go out of the bank too. 
 
This means that the business has a healthy cash flow but no profits. 
 
In another scenario, if business ‘B’ has one lakh annual revenue with a 20% net profit, then it has managed to save 20 INR after a sale of every 100 INR. This is the profit margin they keep after all the expenses are accounted for. 
But imagine they have long payment cycles or customers delaying or faltering payments. This can cause a cash flow issue in business B - which might eventually lead to their failure because of their inability to keep flushing cash into their system. Though they are making profits, without a steady cash flow, it will be hard to sustain. 
So while, in the case of business A, even if the revenue increases and the cash flow stays steady and they might not be making profits; they will stay in business. So, over a period of time, they can work out how they need to create a profit margin - maybe increase the selling price, lower the cost price, cut down on overheads or increase the market share, etc. 
Hence, it is important to prioritize cash flow over profits.  

Some common issues start-ups face: 

Entrepreneurs are an optimistic lot. Whether it is an idea to change the world or to start the next coffee shop, they need to believe they will succeed. That is what will carry them forth to face the myriad of challenges of entrepreneurship.
 
But often, start-up teams are lean and the founders end up doing a lot of the tasks themselves. This can lead to the following issues: 
 
  • Bookkeeping errors:Book keeping is an important part of running a smooth successful business. But it is a tedious process. But if your bookkeeping is not maintained meticulously, it can lead to many issues down the road - you might be left wondering what went wrong, why numbers are not adding up or where the money went! If as an entrepreneur, you are not good at it, or don’t have the time to maintain it, it is best to hire someone to do it. 
                                                                         Ledger and calculation on a page
  • Overspending: As a start-up and a new entrepreneur, you might start off with a lot of zeal and optimism. And this could lead to overspending on office infrastructure, equipment, softwares, marketing, advertising, etc. Before you choose to invest in different things needed to run your enterprise, it is advisable to list them out and categorize them as ‘absolutely necessary’ and ‘good to have.’ You can start with the former and then create a budget to add the things from the latter list. 
  • Incorrect estimations and projections: As a zealous start-up founder, you might create projections that are slightly biased - like accounting the minimum amounts for the expenses and maximum amounts for returns. Or you could underestimate the amount required for expenditure vs income. Or you could be expecting immediate success and get the timelines wrong. 
                                                                    sheet with line graph
  • Not accounting for overheads: While working on your profit margins and calculating the costs of your products or services, sometimes it is easy to overlook the cost of overheads, especially the smaller ones like, electricity, water, office supplies, etc. 
  • Too much payroll spend: Hiring too many people in the initial stages of your start-up journey can prove really expensive and create sustainability issues. It is best to keep teams lean and add team members as you grow. 
  • Not securing a line of credit: This is a big one that can cause severe cash flow issues. As a start-up you might be tempted to pay your vendors upfronts to strike better bargains, while you accept long payment cycles from your clients to secure orders. This difference in how the cash is maintained and paid can cause major financial crunches. Do the best you can to secure a line of credit with most of your vendors and work with your clients to accept the shortest payment cycles possible.   

How can you manage cash-flow and avoid these pitfalls?

 
                                                                             wooden office table with laptop, documents, and cash


 
  1. Determine the WHY: A small business owner should conduct a thorough analysis of existing problems to determine WHY - why is there a cash flow issue?  Is it lack of demand for the product or service, costs of the product or service, or something else? Getting the answers to these questions can help you determine what your next action steps can be to solve the financial crunch. 
  2. Know your Break-Even Point: You should know when your business will become profitable. Often, start-ups do not spend time in calculating this metric. Though the break-even point doesn't really affect your cash flow, it helps a business figure out early goals to drive for and project future potential cash flows issues and plan for them. 
  3. Control your expenditure: This is a no-brainer. Start small, spend cautiously and stay lean. Once you have established your product/service in the market and identified your audience, then you can expand your budgets. 
  4. Create a rainy day reserve: The old adage still holds true. It helps to create a small reserve for a potential rainy day so that you have enough to bail your business out of a sticky situation. 
  5. Create processes & SOPs: Managing cash flows and maintaining money requires processes and discipline. Create systems and procedures that you and your team can easily follow so that all the books are immediately updated and maintained. It can be as simple as keeping a manual or digital record book for capturing all the cash movement - in and out of the organization -while also accounting for the purchase orders received, payments received, payables pending, invoices and more. 
  6. Use tech: Today, technology and simple free tools have made maintenance of cash an easy process. Find free tools that can fit your bill. One of the tools we have found is SlickPie. It is a free online software for small business and startups. You can use it for online invoicing and billing, late payment reminders, bank reconciliation, financial reporting, tax management, document management and more. 
                                                                        Dashboard of online software to maintain cashflow of business
  1. Hire financial assistants: As a business owner of a start-up you might be tempted to do it all - and keep your costs and teams lean. But managing finance is a critical part of running a successful business and sometimes, it is better to delegate this responsibility to someone who knows the job. Hire an accountant to help you manage your cash flow. 
  2. Take upfront payments or encourage customers to pay faster: This could be a tough ask, but make it a part of your negotiation process - offer incentives or discounts for upfront or quicker payments. Remember cash is king and it is wiser to forgo a smaller percentage of your profit to keep your business cash full. 
  3. Bargain best credit period for payables: This is the other end of the spectrum. While, you want to get your payments quicker and faster, secure and set up lines of credit with your vendors and other stakeholders. This could go a long way in managing your cash flow. 
  4. Multiple revenue streams in the same business model: Almost all businesses have a regular outflow of cash towards business operations, but with B2B businesses, inflow of cash only happens when a deal is sealed. And for different kinds of businesses, this cycle may vary in time and effort. When the sales cycle is long, it becomes critical to maintain cash flow. In these cases, it could be helpful for entrepreneurs to think about other streams of revenue in the same business model - that could have short sales cycles and faster payment cycles.   
  5. Have a clear money recovery process: As the founder of a start-up, you are eager to get clients on board. And we could fall into the trap of letting customers pay late and bankrolling them for a few months at a stretch. This is an absolute red flag. This will only choke your cash flow and cause further issues down the road. It is best to create a clear process for the money recovery process. This starts with creating invoices immediately and generating regular reminders. Ensure that your receivables have a clear follow-up process to ensure healthy cash flow. 

Conclusion

Managing cash flow is an ongoing process that takes time and effort. 
 
This is a process of discovery and needs constant monitoring and tracking. As a business grows, knowing how to anticipate and manage cash flow can help you weather the inevitable ups and downs running an enterprise. 
 
Additionally, business owners can optimize cash flow by choosing to opt for part-time professionals and pay exactly for the hours that they need. This could be a wonderful way to create hybrid teams in the new normal while saving on costs of hiring full-time professionals. 
 
If you want to explore options to add part-time and remote professionals to your teams, click here to reach out to us. We can provide you with vetted and experienced talent on-demand! With our experienced talent pool, our agile & cost-effective models, and our rigorous vetting process, you can hire the best talent - for the hours you need, whenever you need it.