“Launching a startup is an easy task,” said no one ever. The struggle is surely an inevitable part of every startup’s journey. As a startup business owner, you would surely agree with that statement. One of the major challenges you may have to tackle is cash flow management. And if you manage it right, that’s going to be great news for your startup business. But if you fail at it, the business will go downhill before you know it. Major issues can come up if you manage your cash poorly, which we will be discussing in this post. We will also let you know ways to avoid such damage by applying the best strategies for startup cash flow management. To learn it all and more about cash flow management, keep scrolling.
Defining Startup Cash Flow Management
Before we proceed, let’s define exactly what cash flow management is. Cash flow management is the process startup entrepreneurs use to keep track of the cash coming into their business and the money flowing out and optimize it. Optimizing here refers to ensuring the number of funds coming in is greater than the amount going out.
Basically, you have to make sure that you make more money than you spend. Cash flow management for startups means carefully monitoring your fund levels so you can plan your startup’s growth.
Why Should You Know About Cash Flow Management?
Cash flow is one of the most important aspects of your business. Cash flow management is the process of monitoring the cash coming into a business, and the money flowing out and taking steps to ensure that the amount of money you have is more than the amount you spend. Proper cash flow management will ensure that your business makes a profit.
Without proper cash flow management, your startup will run into financial trouble before you know it.
Even startups with innovative and fantastic ideas will fall flat if they fail to tackle cash flow challenges properly. This could be because the challenges were unexpected or underestimated. Your business needs to be prepared to prevent such potential issues. If you weren’t, then it’s too late when you finally realize you don’t have enough money to pay the rent or that investment cash has dried up without the customer base needed to support the business.
You have to identify the potential issues to prevent them. We will be discussing them as we go on. Then we will also let you know how to prevent them by applying the best cash flow management strategies. Applying the right strategies will ensure there is enough cash surplus to settle your monthly payments and let you know if and when a shortfall is imminent.
Common cash flow problems faced by startups
As a startup entrepreneur, knowing about these problems related to cash flow can help you navigate through the obstacles a lot more smoothly. So, let’s learn about the potential cash flow challenges that startups may face:
1. Investor money is limited
It’s always exciting when you initially get the funds from investors. However, you need not get carried away by this. If you do, then you will get a false sense of achievement and end up losing sight of your long-term goals. As an entrepreneur, keep in mind that investor money comes with strings attached. They will want a say in the company in return. Plus, the investment cash is not going to last.
2. Unrealistic future growth expectations
We know that your business idea means a lot to you. Of course, you would think it’s the best idea ever. And sure, your idea must have so much potential. However, you have to keep in mind that no matter how good the idea is, unless the customers want it, it won’t work. You have to know that whatever you are creating is for the customers. And it needs to be liked, wanted, and approved by customers.
You have to know for sure if your idea has the potential to be on the market, survive, and bring you profit. It’s important to conduct in-depth market research to gain a realistic point of view. This will help you stay on track with your timelines for the growth of the business.
3. Messy supplier relations
Remember that you can’t expect suppliers to provide small startups with a credit account. Sure, it happens sometimes. However, this is very rare. In most cases, suppliers will need up-front payments at the start. Or else they at least require a significant portion of the outstanding amount. So suppose you are relying on a credit system. Keep in mind that this can hamper your cash flow. In the worst-case scenario, it could cause your startup to fail.
4. Inadequate price tag
Another common reason for cash flow issues that startups face is charging way less for their products. A lot of newbie startups make this mistake because they haven’t done thorough market research. Plus, due to their lack of experience, they wouldn’t understand the expenses of running the company.
If you don’t charge enough for your products or services, you will not be able to make a profit, which can get you in huge financial trouble.
Measuring Cash Flow in Your Startup Business
We mentioned how cash flow is such a crucial aspect of your startup. Failure to properly manage cash flow will harm your business immensely. It is important to measure the cash flow of your business to get an idea of where it is financially.
Methods to measure cash flow in your business
You can use several methods to measure cash flow in a startup business. Let’s take a look at a few:
1. Use the cash flow statement
Most startups use cash flow statements as a method to measure cash flow. Basically, cash flow statements are financial documents that indicate the cash inflows and outflows of a business during a given time period. The cash flow statement tracks where funds come from and go out of your business. You will need to highlight a few elements in your cash flow statement, which are:
Operating activities: This includes everyday business operations.
Financing activities: This includes the purchase of long-term assets by the issuing company. For example, buying shares in certain companies or issuing bonds and debentures
Investing activities: This refers to purchasing or selling assets to increase income or turn assets into different assets.
Your cash flow statement of operating, financing, and investing activities will determine the overall climate of your business. Especially, you will be able to measure if the business is in a good place or not. It also gives you details regarding your startup’s sources and uses of funds, the changes in its cash balance, and its general financial condition.
2. Use net operating cash flow
You can also opt for net operating cash flow. This method breaks down all of the cash coming in and going out of the business. Not only that, but it also adjusts for factors such as amortization and depreciation.
3. Use the free cash flow
Another method to measure the cash flow of a startup business is the free cash flow method. This method only takes into account the remaining funds in your business after every expense has been paid.
You can choose a method from those listed above to measure the cash flow of your startup. Once you choose the preferred method you want to use, you have to start tracking it. How can you do this? Well, the most convenient way to track it is by using a system that automatically tracks your cash flow. You can choose a software program that works for you.
4. Perform Cash Flow Analysis
Suppose you have started tracking the cash flow. The next step is to perform a cash flow analysis. Check if you notice any patterns or trends in your cash flow. By tracking your cash flow and analyzing it, you get an idea of how you manage cash.
You can use the information to make better decisions about cash flow management. This can help you get a sense of what you are doing right with cash flow management and what you should do differently to avoid financial trouble down the road.
Scroll through to find out the best strategies to be used for better startup cash flow management.
Best Cash Flow Management Tips for Startups
We discussed the cash flow management challenges of startups. As we mentioned earlier, it is important to be aware of these potential challenges as a startup entrepreneur. Now that you are aware of the most common startup cash flow management problems, you surely want to know what you can do to prevent such issues from happening to your business. Also, if you have noticed issues with your cash flow management through the data from your cash flow analysis, you would want to know strategies to make better changes and avoid financial trouble in the future.
Let’s take a look at some of the best strategies you can use to ensure your startup makes more than it spends.
1. Focus on Building a Loyal Clientele
Customers can really make or break your business. Earning the trust of your customers can immensely help your business to consistently succeed. So what can you do to build a trustworthy clientele? For instance, check if your company’s policies are customer-friendly. If you don’t think they are up to the mark, work on them to be more customer-friendly. Be sure to start this as early as possible so that you can get your customer relations off to a good start.
Your policies should make sure the customers can have the best experience. You should be able to earn their trust, thereby ensuring long-term customer loyalty. Before you know it, the customers will help massively with the growth of your business. Of course, this process will take some time until you can finally see the results. But as you learn more about your customers, the better you will be able to create what they want. A tip to get to know your clients better is to communicate with them as much as possible. This can be easily done thanks to social media.
You can ask for their feedback, read their comments and suggestions regularly, respond to their comments, conduct small surveys to check their likes and dislikes, etc.
2. Keep Track of Your Spending
As a business owner, your main goal is to make a profit and be successful. However, you cannot expect this to happen overnight when it usually happens over time. Especially during the early stages, you are less likely to make much profit. You would most likely have to depend on the raised capital during the initial stages. So it’s important to be extra cautious about cash flow and spending during this time. You have to ensure that your expenses are as low as possible to maximize profits. Be sure to create a detailed budget and commit to it.
Always keep a close eye on your expenses. It would be best if you did this regularly. That way, you have a better chance of noticing potential issues sooner.
You can keep track of your spending manually by using a spreadsheet. However, as you can imagine, it can take so much of your time. Plus, there is a chance of making mistakes when you handle the data manually. If you are interested in a more convenient method, you can opt for good-quality spending control software. This way, there is not going to be any human error. Plus, it’s time-saving.
3. Get help with managing money
Money management is something that, in theory, sounds simple. However, in reality, a lot of things can go wrong. Startup entrepreneurs sometimes take years until they get a sense of properly managing money. However, some may never be properly able to manage money effectively. Plus, money management takes so much more of your time and effort than you would imagine. This means you will not have enough time for marketing and growing your business.
That is why it would be best to get some expert help managing your money. But if you are just starting out, hiring staff can take a toll on your resources. Instead of hiring full-time staff, you can bring professionals onto your team on an as-needed basis.
4. Make sure you get paid
You must ensure that you get paid on time. To handle this matter, you will need to start with your payment policies. This is necessary to deal with any clients who try to take advantage. Make sure your late payment policies are in place. Don’t hold back from being proactive in chasing up any late payments. Make sure the clients know they will hear from you as soon as the invoice is overdue. That way, they will most likely make sure to settle your payment.
Take it to the next level by offering discounts for early payments. T Sure, this strategy might have an impact on your profit margin. However, on the flip side, this will help manage cash flow. Think about it: this policy will incentivize your customers to settle their payments earlier than billing cycles usually require. Also, try to utilize this strategy with your suppliers too. You can request early payment discounts.
5. Automate Your Cash Collection
To manage your money flow better, you need to make sure to be on time. Here we are specifically referring to settling payments and getting paid on time. We mentioned earlier how important it is to stay on top of receivables. However, it will take so much time out of your busy schedule to keep track of payment due dates and look through late payments.
Can you imagine having to run a business while trying to keep track of your suppliers’ invoices? You can’t afford to waste time on this because you have enough on your plate as a startup business owner. So what can you do? Well, the best solution is to automate the flow of money via a cashless payment system. Using technology for automating cash flow management comes with advantages such as:
It saves time
For instance, it’s going to save you valuable time. provides significant advantages. With this method, you don’t have to manually enter expenses into a paper-based system.
Gives you the ability to monitor the cash flow at any time
Opting for technology for automating cash flow management gives you the chance to access and check up on cash flow whenever you want. Either at home or abroad, you can easily monitor the cash flow.
6. Use inventory management strategies
Does your startup sell physical products? If you do, then this strategy is going to be useful for you.
Here, you need to focus on the rate at which certain stocked items or components are going out and optimize the amount of inventory you keep on hand. If item A is moving twice as fast as item B, then you should dedicate twice as much shelf space to item A.
It would be much more convenient if you had an inventory management system to which you paid close attention. With this strategy, you will be able to minimize the need for huge storage locations. It will help you handle cash flow more effectively since you don’t need to pay for inventory you don’t actually need to keep on hand.
7. Be Smart About Hiring
As a startup business, you have to be careful about hiring staff. It’s too risky to go all out and hire a lot of employees in the beginning. At the same time, you have to start as early as possible to get staff to fill the most important roles in your company. But you definitely need a team from the beginning to help you run the business smoothly. You wouldn’t need a lot of employees in the beginning. But the crew you’re recruiting, although small, needs to be highly capable and skilled.
Your company can benefit from a small, highly skilled staff rather than a large, mediocre staff. Plus, the hiring process costs quite a lot. So make sure not to waste that money on the wrong people.
By following these tips, you can better manage your startup’s cash flow.
Startup Cash Flow Management: Wrapping up
There you have it! We discussed all aspects of startup cash flow management in this post. As we mentioned, cash flow is a crucial aspect of a business. Especially as a startup business, properly handling your cash flow from the start can help you succeed and achieve your financial goals. Managing the funds properly is all about making sure that you have a higher cash inflow than cash outflow. We hope what you learned today will help you manage your cash flow better.
You can measure your cash flow management and check if you are going in the right direction with handling your finances. Use this information to make necessary changes and avoid financial trouble in the future. The strategies we talked about in this article, such as getting a handle on your expenses, staying on top of invoices, building a loyal customer base, implementing payment policies from the beginning, and developing automated payment solutions, can help you improve your cash flow management.