Let’s face it—managing cash flow for your start-up is hard. Expenses are high in the growth stage while revenue is unpredictable. Plus? You’re working with very limited resources.
But getting your arms around cash flow is crucial—since 29% of startups fail due to running out of money. Despite the challenges, there are some strategies you can use to help you maintain a steady flow of funds in the early days.
Let’s dive into the 6 strategies start-ups should use for effectively managing cash flow while fueling growth.
Managing Cash Flow Strategy #1: Hire an Accountant
You’re probably not thinking about hiring an accountant at this stage. But you should be. A skilled accountant provides valuable insights into the financial health of the business, identifies areas of improvement, and offers guidance on managing cash flow effectively.
They can help with accurate bookkeeping, financial analysis, and tax planning, ensuring compliance and minimizing financial risks. And if you’re not ready to hire one in-house, many businesses offer financial advisory services for startups.
Having a financial expert on board will save you money while ensuring you’re primed to take advantage of big opportunities that come your way.
Best practices for hiring an accountant:
- Find someone with start-up experience: As you know, start-ups are a different beast than big corporations. Money is tight and the strategy is constantly evolving. Finding an accountant or service model business with start-up experience is key.
- Define your unique needs: While every start-up has a similar goal of becoming profitable, the way they tackle this mission varies. Be up-front about how your start-up is run and what your long term goals are so you select the right person for the gig.
- Use your network for referrals: Most CFOs are fairly well connected in the start-up industry. Tap into your connections to help you source accountants and find the ideal candidate for the job.
Managing Cash Flow Strategy #2: Invest in Cash Flow Management Software
Cash flow management software like Xero or AGICAP can be a game-changer for start-ups by automating and streamlining your financial operations. These tools integrate with your accounting software and offer features such as automated invoicing, expense tracking, and financial reporting. By having real-time visibility into cash flow, you’ll be able to easily forecast cash flow needs, make adjustments, and identify potential issues before they become critical.
Best practices for choosing cash flow management software:
- Ease of Integration: Do your research to ensure the software you choose easily integrates with your current systems and bank.
- Reporting/Forecasting Capabilities: Choose software with robust reporting that allows you to visualize your cash position in real-time for accurate forecasting.
- Cost/Scalability: Evaluate the cost and scalability of the software to ensure it remains a viable long-term solution.
Managing Cash Flow Strategy #3: Adjust Your Inventory as Needed
For start-ups with physical products, inventory management plays a crucial role in cash flow management. Holding excessive inventory ties up valuable capital and incurs storage costs, while insufficient inventory can lead to lost sales opportunities.
Start-ups should implement just-in-time inventory management practices, closely monitoring demand patterns and adjusting inventory levels accordingly.
Best practices for inventory management:
- Forecasting models: Analyze historical sales data to forecast demand accurately.
- Use reliable suppliers: Establish relationships with reliable suppliers to ensure prompt deliveries.
- Optimize inventory levels: Avoid excess inventory by exploring dropshipping or consignment models. This helps you to minimize inventory costs and free up working capital.
Managing Cash Flow Strategy #4: Optimize Accounts Payable/Receivable
Running efficient and effective practices for accounts payable and accounts receivable effectively is a must for managing cash flow. In doing so, you’ll be able to plan cash flow better and reduce the risk of cash shortages.
Focus on practices like extending payment terms, speeding up collections, and negotiating favorable payment terms with suppliers. On the Accounts Receivable side, offer customer financing and incentives for early payment to help delay cash outflows. As for Accounts Payable, implement efficient invoicing and collection practices to expedite cash inflows.
Best practices for running an effective AP/AR department:
- Clear Payment Terms: Establish clear payment terms and communicate them with vendors and customers.
- Monitor for Overdue Payments: Monitor accounts receivable closely and follow up on overdue payments.
- Offer Early Payment Incentives: Offer incentives such as discounts for early payments to encourage prompt settlement.
Managing Cash Flow Strategy # 5: Create a Financial Forecast
Developing a comprehensive financial forecast is crucial for start-ups to anticipate future cash flow needs and identify potential challenges. A financial forecast provides a roadmap for managing cash flow and helps align financial decisions with the company's growth objectives. It also helps you plan for contingencies, secure additional funding when needed, and make informed strategic choices.
Best practices for financial forecasting:
- Data Research: In order to get the most accurate financial forecast possible, use a mix of historical financial data and market research to develop your projections.
- Regular Updates: Your financial forecast is only accurate if it’s up-to-date. Regularly update the forecasts as your business evolves and strategies shift.
Managing Cash Flow Strategy #6: Maximize Tax Incentives
Governments offer a variety of tax incentives to assist startups during those tumultuous early days. There are many tax incentives to explore from R&D tax credit to the Employee Retention Credit (ERC).
Best practices for mastering taxes:
- Research local tax incentives: Tax incentives vary by state, so do some research to understand which credits you can take advantage of in an effort to maximize your tax incentives.
Running a start-up is stressful. Financing it doesn’t have to be.
Our team at 5th Line specializes in helping growth-stage companies with financial services and non-dilutive solutions for cash flow management. And we have the strategic relationships to get you the most favorable terms.