10 of the Best Founder Tactics for Managing Cashflow
Cashflow management is the lifeblood of any business. For founders, especially those at the helm of startups or small enterprises, navigating the turbulent waters of cash inflows and outflows can be both challenging and rewarding. Effective cashflow management not only ensures the business remains solvent, but it can also pave the way for growth and expansion. Here are 10 tried and tested tactics founders can employ to maintain a healthy cashflow.
1. Regular Cashflow Forecasting
- Why It's Essential: Just as a captain needs a map, a founder needs a cashflow forecast. This tool provides an overview of expected inflows and outflows over a period, allowing for better planning.
- The Tactic: Utilize accounting software to generate regular cashflow statements. These should be reviewed and updated frequently, especially when the business undergoes significant changes.
2. Operate with Lean Principles
- Why It's Essential: Keeping costs down without compromising on quality ensures that more cash remains within the business.
- The Tactic: Regularly review and audit expenses. Can any costs be reduced? Are there more cost-effective alternatives available? A lean operation is often a profitable one so aim to strip out unnecessary expenses and any that are considered "nice-to-have".
3. Maintain a Cash Reserve
- Why It's Essential: Uncertainties are part and parcel of business. Having a reserve helps navigate challenging times without facing a cash crunch.
- The Tactic: Allocate a percentage of profits to a dedicated reserve account. Over time, this will build a safety net for your business.
4. Efficient Invoicing and Follow-Ups
- Why It's Essential: Delays in invoicing or collecting payments can strangle cashflow.
- The Tactic: Invest in efficient invoicing systems. Send out invoices promptly and follow up diligently on overdue payments. Consider offering small discounts for early payments to incentivize clients.
5. Re-evaluate Pricing Strategies
- Why It's Essential: Undervaluing products or services can lead to unnecessary cashflow constraints.
- The Tactic: Regularly benchmark your pricing against competitors and evaluate the perceived value you offer to customers. If necessary, adjust pricing to reflect the value and costs of doing business.
6. Manage Inventory Efficiently
- Why It's Essential: For businesses that deal with physical products, tied-up cash in unsold inventory can be a major cashflow hurdle.
- The Tactic: Adopt just-in-time inventory practices where possible. Regularly review inventory turnover rates and adjust ordering practices accordingly.
7. Explore Flexible Payment Terms with Vendors
- Why It's Essential: While it's important to honor commitments, flexible payment terms can provide temporary relief in tight cashflow situations.
- The Tactic: Build strong relationships with suppliers and vendors. When needed, negotiate for extended payment terms or staggered payment plans.
8. Monitor Cashflow KPIs
- Why It's Essential: Key Performance Indicators (KPIs) provide actionable insights and can signal potential cashflow issues before they become critical.
- The Tactic: Monitor KPIs like the current ratio, quick ratio, and operating cashflow ratio. These metrics will provide a quick snapshot of cashflow health.
9. Limit Fixed Costs
- Why It's Essential: High fixed costs can become burdensome, especially during low-revenue periods.
- The Tactic: Where possible, opt for variable costs. For instance, consider coworking spaces instead of dedicated offices or freelancers instead of full-time employees for project-based work.
10. Seek External Funding When Needed
- Why It's Essential: While bootstrapping is commendable, there are times when external funding can propel growth or alleviate cashflow stresses.
- The Tactic: Build a robust business case and explore funding options like venture capital, bank loans, or crowdfunding. Choose the one that aligns with your business needs and growth strategy.
Managing cashflow is both an art and a science. While the above tactics provide a roadmap, founders must remain adaptable, continuously learning from both successes and failures. In the dynamic world of business, a proactive approach to cashflow, combined with an agile mindset, can set the foundation for sustained growth and success.