When you’re starting a new business, you need to ensure that the money you’re bringing in is greater than the amount that is going out. One way to do this is by increasing your revenue, while at the same time decreasing your expenses. Of course this is easier said than done. We spoke with multiple CEOs for tips on how startups can sustain a continual cash flow that will lead them to profitability.
Know when you’ll break even
“While knowing when you’ll break even won’t necessarily help you maintain a consistent net positive cash flow, it will help you set goals,” says Daniel Sathyanesan, CEO and Founder of Winden. “Once you have established the goals you’re striving for, you’ll be able to allocate your cash accordingly to reach those targets.”
It will also help you be smart with your money and budget wisely along the way. This may force you to be a bit innovative, since you’ll have to come up with cost-effective ideas for growth.
Communicate your goals to your team
It’s important that each member of your team has knowledge of your financial goals and timeline of finance audit. You can do this through budgets, quarterly plans, annual plans, and long-term plans so everyone in the company is on the same page. This will encourage your employees to make decisions that are in alignment with your objectives.
Focus on cash-flow management
“Many entrepreneurs focus heavily on reaching profitability. Obviously this is important, but it’s not the only aspect you should be focusing on. You also need to spend time on cash-flow management,” says Michael Ayjian, Co-Founder and Executive Producer of 7 Wonders. “Ideally, you would be going over your finances on a monthly, if not weekly basis to ensure your spending isn’t getting out of hand.”
Maintain a cash reserve
“Every business should prepare for the worst. Even with ample planning, you’re going to experience lean months. The best way to get through these difficult time periods is to always have a cash reserve on hand. This reserve will lessen your stress and anxiety, and allow you to come up with strategies to improve the current situation,” says Jorge Vivar, Creative Director of mode.
Maintain a single focus
When you have a startup it’s easy to be pulled in multiple directions, but it’s important to keep a clear focus. Many businesses actually fail because they try to be too many things at once. If you spread yourself too thin, you’re more likely to make poor financial decisions and spend unnecessary money. Instead, only invest in areas where you can’t afford not to.
Leave your finances to a professional
“No matter what industry you’re in, it’s wise to hire a professional, such as an accountant or CFO to handle your funds and accounting. If you can’t afford to hire a professional, then designate a highly-valued employee to act as a cash-flow manager,” says Phillip Akhzar, CEO of Arka.
There are service and software platforms out there that you can use to make accounting easier. Outsource accounting companies include Bookkeeper.com, Merritt Bookkeeping, and inDinero just to name a few. All three of these integrate with QuickBooks for an easy, streamlined process.
Track and collect receivables immediately
“Make sure you send out your invoices on time and ideally have them “due upon receipt.” If you do decide to include net terms, have them be no longer than 15 days. If you’re able to appoint someone in your company that can stay on top of your clients who owe you money, definitely do so,” says Ubaldo Perez, CEO of Hush.
If you’re short on staff, simply keep a detailed list of how much money each client owes you, including dates for each transaction. Always keep it updated. You don’t want to get behind on collecting your receivables.
Offer discounts to collect payments earlier
“One strategy for ensuring your clients pay on time is to offer them a discount if they pay early. Not everyone is going to take you up on this offer, but you’ll appreciate the few who do,” says Chris Bridges, CEO of VITAL.
“This will accelerate your cash flow, while at the same time reducing your risk of late or non-paying clients. As a bonus, you can usually establish a good working relationship with these clients,” says Bridges.
Boost your cash inflow whenever possible
You should always be looking for ways to boost your cash flow. This can help ward off stagnation and debt. Ways to do this include raising prices (if applicable), asking for money upfront (through deposits), and/or opening a high-interest earning checking account that allows your money to grow organically over time.
Spend only on essentials
“It’s imperative that you only spend money on essential items, especially during the initial phases of your business. Until you’re profitable and have a steady net positive cash flow, it’s best to cut down on costs and eliminate spending wherever possible. By spending only on items that are crucial to the operation of your business, you’re trimming the fat,” says Brandon Sunny, CEO of Royal Moon.
Be smart about hiring
“Hire top talent. This may sound obvious, but a lot of startups just hire who they can afford, not who they should,” says Max Schwartzapfel, CMO of Fighting For You.
“A highly skilled worker should be able to do the same amount of work as two or three less-than qualified workers. While their salary or benefits may seem steep in the beginning, it’s a worthwhile investment. Mistakes will be made less frequently and one salary (even if it’s high) is still less than two or three. So, invest in talent, you won’t regret it,” says Schwartzapfel.
Make the best use of technology
“In order to maintain a consistent net positive cash flow, make sure you’re backing everything up. Back up all of your files and cash-flow spreadsheets to cloud storage that is secure. This will prevent local file corruption and/or data loss or theft,” says Brett Sohns, Founder of LifeGoal Investments.
As a bonus, you’ll be able to access your documents anywhere that you have an internet connection. This will come in handy if you’re not in the office and you need to look something up.
Track cash flow with a budget
“It’s important that you set up some kind of system that allows you to monitor your cash intake and outtake. A simple way to track your flow is to list out the amount of money you have on hand currently,” says Fred Gerantabee, Chief Experience Officer of Readers.com.
“Then, deduct all your costs from the previous month. Ideally, you’ll end with a positive number, but even if you don’t, this sets you on the right track for next month,” says Gerantabee.
Don’t accept late payments without a penalty
If you decide to accept late payments, make sure you charge a penalty. This late fee will incentivize your clients to pay on time, and if they don’t you’re at least making a profit. Always be upfront about this late fee policy though, you don’t want to anger clients and potentially lose them. To keep things fair, impose the fee after an invoice is 30 or more days late and make sure your invoice was sent out on time.
Keep spending in check
“It’s wise to periodically audit your company’s spending to see where you can cut back,” says Tri Nguyen, Co-Founder and CEO of Network Capital. “If you’re interested in ways to reduce spending, consider negotiating contracts on a regular basis, compare lenders if you’re borrowing money, eliminate redundant insurance, create in-house teams, and pay off debt immediately that’s incurring interest. By following at least one of these steps, you’ll reduce your cash outflow, thereby increasing your cash inflow.”
Apply for a line of credit
Business cards can be a great option for smaller expenses and to stretch out your funds during lean months. Make sure you apply for one during a period of time that you’re consistently bringing in a positive cash flow. This will ensure you receive the best rate. Before deciding on a lender, compare rates, fees, terms, and how repayments work.
Discuss it regularly
“We were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas,” says Michael Dell, Founder and CEO of Dell Technologies.
While P&L statements and balance sheets are important, cash flow statements are equally important, if not more so. For your business to not only reach profitability, but to remain there, you must devote time and energy on maintaining a steady positive cash flow.
If you’re just starting a business, take these tips to heart. The bottom line is, “the more a business owner knows about their cash flow, the more empowered they become,” says Nick Chandi, Co-Founder and CEO of ForwardAI.
