As it is said, 'Cash is King', so you need to smartly spend your money in the early stages of the startup. Nowadays, several startups are getting into the trash due to inadequate cash flow management, as they run out of cash efficiently. Cash flow management plays a crucial role in the establishment of a startup.
One of the main reasons for lousy cash flow is that some startups don't keep track of their money in the early stages. Even big businesses can fail if they don't efficiently manage their cash. If they manage their money correctly, they might not fall into trouble, but if they have bad management of funds, there is a big chance they might fall into trouble.
Let’s learn everything from scratch about managing cash flow in the early stages of a startup.
What is cash flow?
As you can understand from the word itself, cash flow indicates the cash inflow and cash outflow in the startup. Cash flow gives up the complete information about the money coming to and going out of the business.
Cash flow helps monitor different startup sections through which we can identify profitable fragments and control wastage in a particular area. Cash flow is quite different from profit and loss as it takes many things into account, like purchases, credit sales, and non-cash items.
If you have a positive cash flow, you have more cash at the closing than in the opening period; otherwise, you lack money to run your startup. Every startup should regularly prepare a cash flow statement to keep track of the capital.
Tips for Cash Flow Management
Here are some of the most effective tips for better cash flow management in the early stages of a startup:
1. Expenditure Control- The first aim when you start a startup is to establish your startup and gain a reasonable profit. But to execute this, you need to keep track of your capital.
Keeping track of your money will help you to wisely spend your money and allow you to correct the mistakes in the regions of unsuitable investments. Good software will help you effectively track your cash and remove chances of human error.
2. Emergency Cash Reserve- In the early stages of a startup, there is an imbalance in the business. You require immediate funds as some of your assumptions may fail about the expenses. So, in that case, you need funds immediately.
An emergency cash reserve will protect you from spending your savings and taking any debts. It will allow you to use your money efficiently and reduce the burden of debts and extra charges.
3. Owed Money Recovery- As a startup, you may fall into the trap. In the beginning, you may be very happy to see customers buying your products and services, but it is very wrong to let them get away with your money for many months.
This disturbs your cash flow and may harm your startup. So, you should keep an eye on the customers who owe you money. And try to recover your many as soon as possible. Timely remind them to pay you back and start automated charging after some time.
4. Discrete Business and Personal Funds- Having distinct accounts for your work and business work helps you in many ways. It reduces the chance of any confusion in managing cash flow. Using the same account for your personal and business work will provide uncertainty to your company and errors in tax return filing.
Therefore, opening an account for your startup separately and making all your startup-related expenses through that account is advisable.
5. Cash Flow Forecast- If you have continuous and precise cash flow predictions in the early stages of your startup, then you can point out the potential obstacles ahead of time. This will help you to make decisions according to the forecasts and estimations. With the help of a precise prediction, you can make a rough estimate about future events like expenditure on material, and by that, you can change your selling price accordingly.
6. Smart Recruitment- Recruiting employees smartly early on in the startup helps you to cut down many expenses. A competent employee will save you money as you will have to spend less money on recruitment and training him.
A deserving and brilliant employee will help in better cash flow management through his skills and mindset.
7. Fabricate a Budget- Startups should always prepare a budget to monitor their funds and expenses properly. A budget should be made according to the available funds and costs. Having a budget helps you from overspending on unnecessary items and saves money.
8. Hire an Accountancy Firm- It is highly effective to hire an accountancy firm for the startup in the beginning only. A finance expert has better knowledge of the field and how to manage it.
A financial expert will save you actual money and time, which you can use in another area of your startup. This will help your startup to grow positively. A financial expert has experience with many adverse times and can help you to recover from strenuous situations.
Preparing a cash flow statement is effective in keeping track of your expenses. Cash flow management early on in the startup helps you save money and find any error in expenditure. Cash flow management plays a vital role in establishing your startup as it allows you to make decisions according to the available capital and stops over expenditure.
All these tips are highly useful for managing your cash flow and being relieved from financial stress. If you take all the recommendations into account, you may save a lot of funds in the early stages of your startup, as the funds are highly important at such a time. Having enough funds may save you from a downfall in the market or if anything isn't in favor of the business. Therefore, the management of cash flow in the initial stages only may help you grow your business.