Poor cashflow is one of the key reasons for business failure among new startups. So if you want your new venture to start the business journey with the most stable financial foundations, you need to have your cashflow management in shape right from the outset!
Starting a new business requires passion, drive and – most importantly – a truly robust business idea. But to make a success of that core commercial idea you need to also have a core grounding in the basics of good financial management. Cash is king, and it’s the entrepreneurs and founders who grasp this simple truth that will see their enterprise go the distance.
To help you get on control of your start-up cash, we’ve listed 10 key elements that should be on your cashflow checklist.
1. Make cashflow central to your business plan!
Cashflow is about ensuring cash inflows outweigh cash outflows – and that cash process needs to be built into your financial model and business plan at the most fundamental level.
Research your overall running costs (think overheads, costs of production, payroll spend, business taxes etc.) and come up with an income target that covers the expenditure on operating cash outflows. With your estimated operating costs and revenues included in your model, you’re already putting cashflow at the centre of your plan.
2. Set a milestone for breaking even
Positive operating cashflow is your key goal – providing enough liquid cash in the business to trade, cover your costs and (eventually) to break even and realise a profit from the business.
To set a long-term profit target, consider the profit number you’re aiming for, the timescales for breaking even, and how you’ll generate this surplus while also maintaining your positive cashflow position. And bear in mind that most startups will take several years of trading to turn a profit or pay out dividends to directors etc.
3. Stay lean and keep costs low
Being proactive about reducing costs is vital. The smaller your operating costs are, the better your cashflow position will become – reducing outflows and boosting your inflows.
The temptation for many startups is to dive straight into the funding pot and start racking up costs on more employees, bigger offices and the latest tech and equipment. While investing directly in the future of the business is good, spending for the sake of it will come back to bite you – so focus on cost management, run the business lean and reduce every cost you can do.
4. Make pricing work for you
Pricing your products/services right generates the income you need. So it’s critical to do your homework and set the best price for the market and your cashflow needs.
- Set your prices too high and customers won’t bite – meaning you miss your sales targets, revenues slump and you don’t generate the required cash inflows.
- Put your price point too low and you won’t generate enough revenue – resulting in plenty of sales, but an income level that doesn’t cover your operating costs effectively.
Find the sweet spot between ‘quality product’ and ‘competitively priced’ and ensure you produce the required revenues you set out in your business plan.
5. Use technology to stay in control
It’s easy to stay in control of your finances with cloud accounting. Cloud platforms like Xero, Quickbooks and Sage provide a simple online way to record, track and monitor your finances.
Using a cloud accounting system to run the business:
- Helps you record all your costs, expenses and income accurately
- Provides you with real-time financial data around your cash
- Allows integration with a host of cashflow, credit control and payment apps.
6. Get paid as quickly as possible
Getting paid on time can be a huge issue for startups – and when your invoices don’t get paid on time, that has a serious knock-on effect on your cash position.
Using online invoicing software speeds up payment times – and most of the popular cloud accounting platforms will include online invoicing as standard. Your bills go out directly to customers via email, with payment buttons that link to your choice of payment gateway, whether that’s PayPal, GoCardless or Square etc.
7. Keep in control of debtor tracking
Managing your debt is incredibly important for a new business. Recent figures show that UK SMEs are owed £26.3 billion in overdue payments – and when aged debt racks up, that has a seriously negative impact on your cashflow.
Run aged debtor reports on a regular basis and keep a proactive focus on which customers owe you money, how much that amounts to and how overdue that payment is.
Having a clear credit control policy also helps, by making your payment terms clear and setting the expectation that your startup anticipates its customers settling payment on time, every time.
8. Run regular cashflow statements
Your cashflow statement is the key hub for cash management. It’s where you see your operating, investing and financing cashflows broken down in the most granular way.
Cashflow apps and reporting solutions will allow you to specify a prior period – whether by week, month, quarter or year – and show you the historic data on your cash income and costs across the business. By running these statements regularly, you will begin to see the dips in income, the spikes in expenditure and the overall pattern of your cashflow.
Having that clear overview helps keep you in control of your current cash situation, while also allowing you to plan more effectively for future periods.
9. Forecast cashflow for future periods
Knowing your cashflow position in the future is invaluable. Whereas your cashflow statement tells you what happened in the past, a cashflow forecast gives you an accurate understanding of the future path of your cash inflows and outflows.
Forecasts take the historic financial data from your cloud accounting software, and extrapolate the data forward in time. This gives you a means to peak through the ‘cashflow crystal ball’ and spot the potential cash issues before they happen – keeping the whole business on track.
10. Use the latest smart cashflow tools
Software tools move your cashflow into a practical reality – using the latest in technology to help you manage your cashflow promptly, effectively and with minimum hassle.
Manually keeping on top of the various elements of cashflow, debtor tracking and aged debt can become a complex task. But with a smart cashflow tool like Fluidly, the benefits of automation, artificial intelligence (AI) and smart data analysis come into play.
With built-in reminders and notifications to keep you and your finance people in control, our intelligent cashflow app becomes the financial reporting engine for the whole business.
Keep your startup growing with smart cashflow tools
With your startup in a positive cashflow position, you give your business the best chance to evolve, grow and scale-up effectively – and the hard work of maintaining positive cashflow is all taken care of when you put Fluidly at the centre of your finance system.
There’s a host of helpful cashflow, credit control and forecasting tips at the Fluidly blog
