By Fernando Berrocal
Even as a fledgling entrepreneur in the business landscape, you’re likely aware that the management of startup funds is essential to establishing a successful, thriving business. In fact, according to recent data, 82% of small businesses in the US closed their doors at some point as a result of cash flow issues. Poor cash flow management–or a lack of awareness of how it is managed–are two frequent culprits of these issues.
The ability to satisfy your main financial responsibilities, such as loan repayments or maintaining overhead costs, is why cash flow is essential for all types of businesses. Additionally, the proper management of cash flow enables you to determine which costs in your business are no longer required; and whether your organization is developing beyond its expectations, or getting stuck in the weeds. Finance is the lifeline of your small business; you must manage your accounts in order to survive. Many founders, however, can’t tell if or when they are encountering such problems. Furthermore, those who do are often left clueless regarding to how to respond.
With this in mind, take a moment to contemplate what cash flow actually signifies for your business. Since it essentially reflects the money that enters and leaves, a deep understanding of this system is crucial. Bear in mind that cash flow can be positive or negative–meaning that a firm may have more or less money coming in at a given time. Cash flow can be impacted by a several variables, including sales, company costs, and the amount or rate that money is being borrowed at. Cash flow is crucial for an organization's ability to pay expenses, pay employees, and invest in new business prospects. Cash flow can also give you access to the operating capital you require for expansion and business growth. When you cultivate positive cash flow within your startup, you are enabled to continue running your business while you wait for revenue. Think about it: without a positive stream of incoming capital, startups would have to cease operations very rapidly.
So, what is the management of cash flow? You might find that as your firm grows, your costs outweigh your income. That's okay, since there are expenses related to conducting Research and Development (R&D), executing marketing campaigns, and employing personnel (to name just a few examples). These costs will persist throughout the early phases of your startup's growth. However, at some point you'll need to generate more revenue. This is where cash flow management comes in. The practice of controlling and enhancing an organization's cash flow is known as cash flow management. There are a variety of factors and circumstances that might affect it–events like unforeseen spending, or slow-paying clients. Due to this, you must understand your cash flow–and have methods in place to manage it well.
How can you tell if your startup is encountering cash flow issues? Part of the issue is that the diagnosis of problematic cash flow is really challenging in many circumstances. When the problem becomes glaringly obvious, it is often too severe to be fixed. There are, however, viable steps to take in avoiding this eventual descent into chaos.
Common Signs You Are Not Effectively Managing Cash Flow
- Spending exceeds your startup's income.
You are living beyond your means. It's unsustainable for you to keep spending money that you don't have. Even beyond those realities, this is classic behavior that results in debt. Financial difficulties will arise if your expenses are more than your income consistently. Remember: if you engage in a habit, it can be challenging to stop, making this a difficult struggle to overcome.
To overcome this situation, ensure that you are aware of all of your costs–from producing your products, to conducting marketing campaigns and paying your personnel. It's vital to make a budget and follow it. Make saving a key priority, and keep track of your expenses to understand where your money is heading.
- Your clients are not making timely payments.
Sales revenue is essential to the survival of small businesses. When your clients don't pay on schedule, a serious issue arises. The other aspects of your startup will suffer if your money arrives later than scheduled.
Sending your bills to clients as early as feasible might help you prevent this. Using this, you may gently remind them to make their respective payments. By submitting claims ahead of time, you provide your clients extra time to pay you before the due date is established.
- Your staff–and you–are overworked.
Do you feel as if you have a lot on your plate–and yet never seem to finish anything? One of the main benefits of hiring even more employees is their ability to take on certain activities that might be too time-consuming and tiresome for you to handle as a founder. Additionally, by getting more time from your staff, you can prevent work burnout–which might lead to significant absenteeism and a better business climate.
By placing the appropriate individuals in the right position, your extra staff will help you to reduce your burden. In addition, adding more team members can mitigate the risk of employee burnout–and enhance team productivity. Also, this frees up additional time for you to concentrate on important business operations and client growth.
- You make late payments.
Your cash flow can be seriously affected by late payments. If they become a regular occurrence, your business may start to suffer. Late payments can negatively impact your credit rating, which is crucial when applying for loans. Moreover, paying late results in additional late fees or interest, which add up and increase the cost of your loan. Additionally, paying payments late might lead to anxiety and tension over money.
To help you remain on top of your obligations, you may either hire a bookkeeper or use accounting software. If you're having problems making payments, you may always obtain a small business and startup loan to combine your debts.
In conclusion, as a small business owner, you must be aware of your organization's cash flow. When you reach and sustain positive cash flow, you'll have the resources you need to invest in your business, and watch it develop over time. Negative cash flow may restrict your ability to make these kinds of investments–so take the proactive steps to avoid this scenario.
Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.
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