Education

Cash Flow Management for Startups

by PRIYANKA GOTHI|15 May 2022

The ‘be your own boss’ sentiment has always been a very attractive reason for people to think about owning their own businesses. From a distance, it seems as if startups and entrepreneurship are all about innovation and freedom. While that might be true on some levels, a huge part of building a startup success story boils down to serious business strategies.

And when you talk business, you talk cash!

Reports suggest that more than two-thirds of startups never deliver a positive ROI to their investors. Some might argue about deeper reasons for this massive failure rate, experts blame it all on poor cash flow management techniques.

Before we attempt to understand what a startup cash flow strategy looks like, let us first meet the elephant in the room!

 

What is cash flow management?

To put it simply, cash flow is a term used to describe cash inflow and outflow. To function properly, and over a large tenure, businesses require cash. This cash is used to pay bills, and salaries, and also to facilitate expansion. Ideally, businesses, especially the smaller ones, must operate with a sufficiently large cash reserve at hand. This reserve allows founders and investors to feel secure and also ensures smooth crisis management.

 

How to manage cash flow as a startup?

Startup cash flow management can be a tricky task, especially because most entrepreneurs do not come from accounting or finance backgrounds. To understand and manage liquidity in such a case, it is important to know the basics!

 

  • Profit ≠ Cash inflow!

Most confuse them with each other. They are not entirely at fault. When it comes to personal cash flow management, there is no need to differentiate between the two terms. When it comes to business though, profit on papers might not always come with instant cash. This happens mostly because of delayed, and worst, denied payments. So, the amount receivable doesn’t represent in flowing cash, unless the payments have been collected.

 

  • Discipline is key!

Cash flow checks are not a once in a blue moon activity. They need to be managed everyday.  In addition to irregular checks, mistakes and frauds also hamper startup cash flow and cash reserves. This is a by-product of an unorganized approach to cash management. When transactions are not duly recorded by the founders, such gaps go unnoticed. A regularly monitored cash flow ensures that faulty transactions and potential frauds can be avoided, well in time.

 

  • Know your business!

Behind every startup success story is a well-aware team. A team that has a profound knowledge of everything related to their industry. Every industry does not require the same amount of investment of cash. Know your business, ask yourself questions regarding your vision, determine the magnitude of cash reserve your need, and navigate your cash flow accordingly.

 

  • Seek help when you need it!

Every successful entrepreneur does not come from a finance or accounting background. Yet, the reason they manage to make it to the top is because of an extraordinary level of awareness. You don’t always have to maintain a positive cash flow through profits and sales. Sometimes, the right way might be to finance your business – via debt or equity. If you are going with the former, make sure you have enough profitability to be able to pay the loan back in time.

 

  • Seek help, but don’t be dependent!

Adding to the previous point, as great as it might be to get help onboard, make sure you understand the financial operations and dependencies of your company. Ask questions on outflows, credit periods, payment cycles, read often, learn, and be curious. The more you understand the basics, the stronger your business becomes.

 

With the vulnerabilities of a new business, it is increasingly crucial and yet equally complicated to save a startup from running out of cash. What might prevent that crisis is a clear understanding of the product, its production cost, and every other expense that is associated with your industry.