82% of the Failed Businesses in the US had a Cash Flow Problem! How you can Save your Startup?
Every business goes through financial distress at some point in time. But the most sensitive and vulnerable stage is just before its take-off. In this stage, the business is called a startup. It starts with an idea and some people who believe in it. And if the idea is the engine of this startup vehicle, then the cash is the fuel. A startup needs capital to run its operations, to market itself and to keep the morale of its team high. And all of this is done, without the expectations of guaranteed returns.
Steps to avoid discrepancy between your startup’s cash in and cash out:
To save your startup from the cash flow crisis, you also need to take some steps that reduce your risk and prevent the business from the embarrassment of a cash shortfall. These shortfalls can lead to many setbacks for a business. Sometimes it may just end with a small unexpected trip to the bank, or sometimes you might miss an attractive investment opportunity. But the impact of a severely disturbed cash flow can even lead to bankruptcy. Hence, to avoid any significant discrepancy between your startup’s cash in and cash out, you can take the following steps:
1. Encourage Advance Payments
As a startup owner, you may sometimes find yourself in a very desperate situation to get a customer onboard. This desperation can lead to some extreme conditions like zero payments until the product or service is provided to the customer.
You can encourage an advance payment by offering them some discounts or offers. Also, you can provide them with some extra service for full payment in advance. A pay-in-advance structure must be included in your rule-book. Make the terms clear on pre and post work payments.
There is no gain for your business in filling up the balance sheets with “accrued receivables” and spending time on the phone to get the bills cleared. As a startup, you need to make the flow of money fast and seamless by deploying cloud CRM solutions. You are not some big conglomerate yet, which can afford to see their payments stuck for years.
Even in tough times of your business, avoid using “You can pay us the entire 100% amount, once the work is done”. Instead, explain your operational costs. And ask them to pay up in advance for these costs. Although the service charge can be discussed later. Otherwise, things will get way harder for you if you pay for the operational expenses also from your pocket.
2. Sync your suppliers’ and customers’ transactions
Your “cash in” is from your customers and “cash out” is to your suppliers. It is not necessary that you and your supplier work on a similar payment cycle. For example, your supplier may follow a retainer structure where he wants the moolah a month in advance. But your customer will pay you only after a month of your work/service. In such cases, it is fairly easy to get into negative cash flow.
To avoid such problems, improve your working cycle and credit terms. Do not sign multiple contracts at one time, if you don’t have money to get the supplies. Instead of working in parallel, try to work in series. Pay up for the new supplies using previous projects’ earnings.
You can also ask your suppliers and contractors to sync credit terms with you. Assure them that they are the only suppliers you are going to buy from. Then, probably, they will try to consider your request and sync payment cycles with you.
3. Avoid delay in invoicing
If you are not showing any urgency for your payments, then customers might delay them too. It may not be malicious on their part but a simple human psychological response. The customer may think that if you don’t care about your money, then they are the least bothered. Or they may assume that you are not in an urgent need of money and hence the payment can be delayed.
Delay invoicing can hamper your cash flow. Don’t take the booked revenue for granted. Develop a custom automatic invoicing software if you need. It will release the invoices on an immediate basis and also keep track of the payments.
4. Classic solution of reducing expenses
This is so cliché to say that cut costs if you are having cash problems. But it has always been the best, immediate and most preferred approach of any business. When the business goes through a turmoil, some operational areas will have to take a hit.
The overhead expenses may take your startup in the wrong direction altogether. Whether in the form of avoidable traveling or unnecessary online services, you can overshoot your budget in many ways. Take a look at your employee costs; check if you can replace monetary rewards with something else. Find out more affordable suppliers and contractors. Change your marketing strategy and communication platforms, which can give a sigh of relief to your pockets.
Remember, every drop counts when you are trying to manage things in a cash crisis.
5. Always save for an emergency fund
Another old advice, but often most ignored by the startups. They get so aggressive in the perfection of their newborn company that they forget to keep something aside for its protection. Do not forget that you are running a new business and even if the odds are in your favor today, the market may not be a shining rainbow for you all the time. Hence, if you are going through some good times, always save something for your emergencies.
Immediate cash requirements can be for so many things in a business. It can be for a good situation like bagging of a new big contract and hence, you need money to get the supplies. It can also be for bad situations like an accident in the office building. Therefore, having some extra cash for these kinds of emergencies will always help an undisturbed flow of money in your business.
Here is the infographic:
Business is nothing but a series of small gambles with calculated risks. It demands time, effort and most importantly, money. A cash healthy company does not only work smoothly but also displays more confidence in the market. Even a single bounced cheque can tarnish the image of your brand.
The best and worst thing about time is that it never remains the same. Maybe today you are going through a hard time, but if you keep on working smart and hard, the tables will turn eventually. But most important is to survive through these times. Hence, do not give up easily on your business and trust your survival instinct.