Navigating the Rapids: Short-Term Cash Flow Management Tips for Startups
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Launching a startup is an exhilarating journey, but it comes with its fair share of challenges - especially when it comes to managing cash flow. With 38% of UK startups failing because they run out of cash, survival in the early stages depends on effective short-term cash flow management.
At Scaleup Finance, we have come up with some practical tips to help startups navigate the turbulent waters of cash flow, helping them to secure the liquidity needed to keep the business afloat.
Create a Detailed Cash Flow Forecast
The first step in effective cash flow management is to have a clear understanding of your financial landscape. Create a detailed cash flow forecast that outlines your expected income and expenses for the upcoming weeks or months. This proactive approach allows you to anticipate potential cash shortages and plan accordingly.
When putting together a cash flow forecast, the general guideline is to look at the next 13 weeks so that you have a full quarter in your workings and capture any quarterly cash flow items. You should start with your actual cash balance and take account of invoiced receivables, sales pipeline, fixed costs, payroll and any other variable costs.
Ideally, you should carve out some time on a weekly basis to review your actual cash flow over the previous week and compare it to your forecast. This will allow you to make regular updates to your plan and identify opportunities for cash flow optimisation.
Negotiate Favorable Payment Terms
Negotiating favorable payment terms with suppliers and vendors can significantly impact your short-term cash flow. Explore the possibility of extended payment terms or discounts for early payments. In some cases, suppliers, including HMRC, may allow you to set up a payment plan to get you through a cash flow squeeze.
Building strong relationships with your business partners and communicating openly about your financial situation can lead to mutually beneficial arrangements.
Invoice Promptly and Follow Up on Payments
Ensure that you invoice your clients promptly upon the completion of services or delivery of products. Implement a system for regular follow-ups on outstanding payments, most ERP systems, such as Xero, have automated dunning modules that can be activated. Timely invoicing and persistent follow-ups can help reduce the occurrence of late payments, therefore improving your cash flow.
Undertake a Subscriptions Audit
Embarking on a subscriptions audit is like spring cleaning for your startup's wallet. By giving your monthly memberships a second look, you might discover a few dusty relics that can be retired - helping you to save cash without sacrificing productivity.
Monitor and Control Operating Expenses
Keep a close eye on your operating expenses and identify areas where costs can be reduced without compromising the quality of your products or services. This might involve renegotiating contracts, finding more cost-effective suppliers, or implementing internal cost-cutting measures. Prudent expense management is crucial for maintaining positive cash flow.
Seek Out Quick Revenue Diversification Wins
Diversifying revenue streams with a focus on low-hanging fruit and easy wins is a savvy strategy to extend the short-term cash runway for your business.
Identify supplementary products or services that align with your existing offerings, leveraging your current customer base and operational capabilities. Look for opportunities where minimal investment can yield quick returns, providing an immediate boost to cash flow. Whether it's introducing add-on services, creating limited-time promotions, or tapping into untapped market segments, these incremental additions to your revenue portfolio can make a significant impact.
Explore Short-Term Financing Options
In times of cash flow strain, consider short-term financing options to bridge the gap. This could involve negotiating a line of credit with a financial institution, exploring invoice financing, or seeking short-term loans. However, it's essential to carefully assess the terms and interest rates to ensure that these options are viable for your startup.
You can find out more about the alternative financing options available to your business in our previous blog post on the topic.
Stay Agile and Adaptive
Be prepared to adjust strategies based on changing market conditions, proactivity is the linchpin of this approach – staying ahead of the curve in identifying and addressing potential cash flow challenges before they escalate
The Bottom Line
Effectively managing short-term cash flow is a critical skill for startups aiming not only to survive but to thrive in the business world. By implementing these tips and maintaining a proactive approach to financial management, your startup can weather the initial challenges and lay a solid foundation for long-term success. Remember, navigating the rapids of cash flow requires a combination of foresight, discipline, and adaptability.
FAQs
All the answers you need for all the questions you’ve got.
(But also TL;DR)
How should a startup business prepare its budget?
To prepare a budget for your startup, begin by listing all potential expenses you anticipate in starting and operating your business. Next, organise these expenses into categories. After that, estimate your monthly revenue and calculate the total costs required to start and run your business.
What are the key steps to creating an effective budget?
Step 1: Determine and track your income sources.
Step 2: Make a list of your cost. Include both fixed and variable costs.
Step 3: Set achievable financial goals.
Step 4: Develop a plan to meet those goals.
Step 5: Put everything together to build your budget.
Step 6: Regularly review and revise your forecast to ensure it remains effective.
What does capital budgeting entail for a startup?
Capital budgeting for a startup involves allocating a set amount of funds for specific purposes, such as purchasing new equipment or expanding business operations. This process is crucial as it supports making strategic investments that are expected to yield long-term benefits for the startup.
FAQs
All the answers you need for all the questions you’ve got.
(But also TL;DR)
How can a startup forecast its cash flow?
To forecast cash flow for a startup, follow these steps:
Step 1: Create a sales forecast by estimating the revenue your products or services will generate over the forecast period.
Step 2: Develop a profit and loss forecast to understand your expected expenses and income.
Step 3: Prepare your cash flow forecast, which involves calculating expected cash inflows and outflows. This can often be done for longer-term by using assumptions around payment terms to forecast a Balance Sheet, and using the movements in Balance Sheet and Net Profit/Loss to calculate the cashflow.
Step 4: Consider ways of improving cash flow by improving your invoicing methods, considering short-term borrowing, and negotiate better payment terms to manage cash flow effectively.
What is the most accurate method to forecast cash flow?
The most accurate method for forecasting cash flow in the short-term is the direct method, which utilises actual cash flow data. In contrast, the indirect method is better suited for longer term forecasting using projected balance sheet movements and income statements to estimate future cash flows.
How is cash flow calculated?
Cash flow is calculated by deducting cash outflows from cash inflows over a specific period. This calculation alongside forecasts of future cash flow helps determine if there is sufficient money available to sustain business.
How do you project cash flow over three years?
To project cash flow over a three-year period, undertake the following steps:
Step 1: Collect historical financial data.
Step 2: Identify all expected cash inflows, which could include revenue, investment, grant income, etc.
Step 3: Estimate all anticipated cash outflows including expenses, suppliers that need to be paid, investments into assets, debt repayments, etc.
Step 4: Calculate the net cash flow by subtracting outflows from inflows.
Step 5: Consider your cash reserves and explore financing options if needed.
Step 6: Regularly review and adjust your projections to ensure accuracy and relevance.
FAQs
All the answers you need for all the questions you’ve got.
(But also TL;DR)
When should a startup consider hiring a CFO?
A startup should think about hiring a Chief Financial Officer (CFO) when it begins to experience rapid growth, finds it challenging to manage finances, or needs to navigate complex investment scenarios. A seasoned financial professional can provide the necessary expertise to handle these challenges effectively.
What are the indicators that my business might need CFO support?
You might need to hire a CFO or consider outsourcing this role if you notice any of the following signs: a decrease in gross profit margins despite increasing revenue, uncontrolled business growth, lack of cash reserves despite having a financially successful year, or a halt in business growth.
Does my startup really need a full-time CFO?
Recruiting a full-time CFO is an expensive hire. Given budget constraints and the need to prove the viability of your business idea, founders will often need to prioritise investing into building and commercialising their product. That's where CFO services for startups are a cost-effective solution for founders looking to take their financial management to the next level.
