Cash flow problems are one of the main reasons that new businesses fail. You could have the best product idea in the world, but your business will never survive if you run out of money before you have a chance to market it effectively and build a strong customer base.
Look, I’ve been there. I started my first company with nothing but a dream and a credit card. I made a lot of mistakes, but I learned a lot along the way. And one of the most important things I learned is that cash flow is king. If you don’t have cash flow, you’re dead in the water.
So here’s my advice to you:
- Start with a solid business plan. Your business plan should include a detailed financial projection that outlines your startup costs, projected revenue, and expenses. This will help you to identify any potential cash flow problems and to develop a plan to mitigate them.
- Get a line of credit. A line of credit is a revolving account that you can draw on as needed. This can be a lifesaver if you experience a sudden dip in revenue or an unexpected expense.
- Negotiate favorable payment terms with your suppliers. Try to negotiate payment terms of 30 or 60 days with your suppliers. This will give you some breathing room to collect payments from your customers before you have to pay your suppliers.
- Track your cash flow closely. It’s important to track your cash flow on a regular basis so that you can identify any potential problems early on. There are a number of software programs that can help you to track your cash flow.
- Don’t be afraid to ask for help. If you’re struggling with cash flow, don’t be afraid to ask for help from your accountant, banker, or other financial advisor. They can help you to develop a plan to get your business back on track.
By following these tips, you can increase your chances of avoiding cash flow problems in your first year of business.
Now go out there and make it happen!
The first year is a crucial period for your new business because you need to build the company from scratch with a limited amount of money and keep it going until you manage to break even. Unfortunately, a lot of people don’t make it that far and they run out of money long before then.
If you want to avoid the same fate, it’s important that you follow these simple cash flow management tips.
Raise Enough Startup Capital
Poor money management is one of the most common reasons that businesses run into cash flow issues. But in some cases, the problem is that they don’t have enough money in the first place. People often underestimate how expensive it is to start a business so they burn through all of their startup cash way quicker than they anticipated. New business owners sometimes get caught out by their own confidence as well. They assume that their product is going to be a huge hit and they’ll break even in the first 6 months, so they don’t need that much startup capital. But that isn’t always the case and it may take you longer than you think. It’s always important that you are confident about your own business, but you do have to be realistic as well.
If you rush into things and start the business before you have the funding to sustain yourself, you are likely to fail. That’s why you need to look for the best business loans and look for other outside investment as well. If you are saving up the money to fund the business yourself, it may be better to hold off for a while and save some more money. The more startup capital you have to begin with, the easier it will be to manage your cash flow effectively.
Know The Numbers
When businesses start to run low on cash, that doesn’t necessarily mean that they are doomed. If you cut spending and start looking for new revenue streams, you can turn things around and keep the business alive. But you can only do that if you know that there is a problem and you intervene early. If your cash flow issues go unnoticed for a long time, it will be too late by the time that you start trying to turn things around. That’s why it’s so important that you know the numbers and you keep a close eye on your business finances.
It’s always a good idea to hire an accountant, but if you can’t afford to pay a full time member of staff, you can outsource accounting instead. Unless you have experience as an accountant, you shouldn’t try to handle the finances on your own because you are likely to make mistakes. You need to have regular meetings with your accountant as well so they can make you aware of any potential issues. Unless you know exactly how much money the business is bringing in and how much you are spending, you won’t know if there are any issues.
Find Ways To Cut Costs
Overspending is the most obvious cause of cash flow issues, which is why it’s important that you find ways to cut your overheads. One of the best ways to save money in business is to invest in technology. Things like marketing automation software, for example, can reduce your staff needs and improve productivity in your business. The right accounting software can help you to identify areas where you are overspending so you can cut back and make savings. By investing in technology, you can make long term savings on your overheads which makes it easier to manage cash flow. However, you will need a lot of initial investment and if you spend too much, you will cause yourself short term financial problems, so it’s all about finding a balance.
The cost of renting an office space is probably your largest overhead, so it’s important that you find ways to cut back. One of the biggest mistakes that new businesses make is trying to expand too quickly. They start to get a few customers so they decide to hire a load of new employees and rent a big office space. But then they can’t handle the increased overheads and they run into financial issues. But for most businesses, there is no need to rent a huge expensive office anymore. You can save a lot of money if you let employees work remotely and use freelancers, rather than hiring a big office space. You can use coworking spaces if you do need meeting rooms from time to time. Not having to pay rent and utilities on a large office will make it a lot easier to manage your cash flow. After the first few years, when things are more stable, you can consider moving into a more permanent space.
Get A Business Line Of Credit
A business line of credit can be a real lifesaver when times are tough. You can borrow money when you need it and then pay off the balance when your finances improve again in the future. But a lot of businesses make the mistake of waiting until they desperately need a line of credit before they apply for one. But it’s better to take one out right away and keep it there as insurance. You don’t need to use it if you don’t want to, but having it there will help to reassure and protect you from financial issues in the future.
Chase Up Invoices
If your business invoices customers for payment, you need to be on top of those invoices. So many new businesses find themselves in trouble because they are not proactive about chasing up invoices. That means that they’re spending lots of money and they’re getting customers, but they aren’t bringing in any revenue because all of their customers are paying late or not paying at all. When you are first starting to find customers, you don’t want to do anything to put them off and a lot of new business owners are afraid to ask for the money because they think that they might lose the customer. In some cases, you will lose the customer if you keep pushing them for money, but that’s the risk you have to take. If you let them get away with paying late this time, they’re only going to do it again next time. You may keep the customer but your problems with payment will get worse and worse. What you need to focus on instead is finding customers that are happy to pay up on time, so you can drop the difficult ones.
If you do have unpaid invoices, make sure that you are proactive about chasing them up. Always give clear invoices and give a good amount of notice so they have no excuse for not paying. You can also use invoice financing services so you can get the upfront cost covered and then the debt will be collected from the customer. This means that you can keep your cash flow moving and you won’t end up in trouble because customers are not paying their invoices.
If you are a bit strapped for cash and you want to give yourself a bit of a boost, you should consider selling some of your assets. If you have equipment like computers or printers that you no longer use, you should sell them off. Excess inventory can also be sold off at a reduced price to make some quick cash. Larger assets like company vehicles can also be sold off if they are not completely necessary and you are in need of some extra money. You can also sell stock in your company if you want to raise some money in a rush. If your business has potential, it may be an attractive prospect for investors and you could make some good money.
Delay Payments To Vendors
Payments to vendors like manufacturing companies and courier services eat into your cash reserves a lot. But you need to pay those bills on time if you want to maintain a good relationship with suppliers and avoid any late fees. However, if you are struggling with your cash flow, you should try to delay those payments as much as possible without going past the deadline. If you can leave it a few weeks and keep that cash in your bank account, without having to pay any extra fees on top, that can be a big help. If you are really struggling, you should consider asking vendors to set up a more manageable payment plan.
It’s likely that you will experience cash flow issues in the first year of your business but if you follow these tips, you will be able to avoid any major disasters.