Keeping track of cash flow can be a challenge even for the most established of organisations, never mind a young startup. But don’t panic; the team at The Accountancy Cloud have provided us with 5 top tips for cash flow management.
No matter why you’ve decided to launch your own startup — to dedicate yourself to your passion, to show off your skills and talents, or even to revolutionise the world — there will always be one goal that you’ll share with every other business owner: to generate income! The problem, however, is that income alone doesn’t really do much to demonstrate success. Instead, it can sometimes be more beneficial to look at cash flow — the ins and outs — as a whole. But just what are the best ways to manage cash flow?
1. Understand Where Money’s Coming From… And Where It’s Going
The first step towards successful cash flow management for startups is simply to understand where your cash is coming in, and where it’s going out. Cash flow statements, which are regularly overlooked by small businesses, can be hugely beneficial in highlighting ‘inflows’ and ‘outflows’, but there are also a number of specific areas that are important to analyse. In terms of inflows, consider average revenue per account and customer lifetime value; for outflows, look at customer acquisition cost and your churn rate.
2. Take a Look at the Bigger Picture
Financial analysis — looking at cash flow statements, for example — is vital for startups, but it’s not the ‘be all and end all’ of successful cash flow management. That’s because these statements can be heavily influenced by many external factors; a few late payments to your suppliers can suggest a better financial status, while one-off costs, such as purchasing new equipment for your startup, can make it look like you’re in the red. Take a look at the bigger picture, and consider wider aspects such as profitability.
3. Be Prepared for Ebbs and Flows
Managing cash flow should always be a mid- to long-term concept; not a short term strategy. That’s because there will always be cash flow ebbs and flows, and this is especially true for startups. Why? Because there are definite financial transitions that a startup will go through as it begins to become a more established business. Consider the ‘flows’ of increased turnover as a result of rapid growth for example, coupled with the ‘ebbs’ of greater debt as a result of taking out further development loans.
4. Stay on Top of Things; Don’t Fall Behind
There are many common business issues that, while not specific to startups, can impact a startup to a much greater extent than a larger, more established company. One of these issues relates directly to accounts receivable. While a late payment from a customer can be frustrating, for startups that rely heavily upon timely remuneration for day-to-day operations, cash flow figures can become heavily distorted. Staying on top of things is vital, perhaps even automating payment chasing using software.
5. Develop a Cash Flow Management Plan
One of the most effective tips for managing cash flow is simply to develop a realistic cash flow management plan. While each plan will differ depending on individual business needs, standard features of such a plan include identification of cash flow obstacles, acknowledgement of day-to-day operational expenses, and preparation for building a positive overall cash flow. Startups will also benefit from the solid documentation created by a cash flow management plan; a beneficial tool for attracting investors.
Measuring Financial Metrics
As a startup, it’s tempting to get caught up in income alone. After all, income is a good indicator of your reach, and your value to your target audience. However, income isn’t always a good metric to analyse when it comes to looking at financial success and outlook. Cash flow can be much more valuable.
Check out The Accountancy Cloud’s guide to Managing Cash Flow for Tech Startups which provides more useful information on the best ways to monitor and track your business’ early financial health.