Startup - 5 Actionable Items For Better Cash Management

Are you running out of cash faster than you expected? Your startup’s Profit and Loss Statement (Income statement) may show positive net income, yet you may not have much cash in the bank. Why is that? There could be many reasons, depends on your industry. Here we will show you some quick tips on how to tighten up your financial operation, so that you won’t run into any major cash problems in the future.

1. Get paid upfront

There’s nothing wrong with asking for payment right off the bat. By asking, you can gauge how willing the client is to pay. This will help you proactively manage cash flow and make sure your startup has enough cash to thrive and survive. Let your clients know your company asks clients to pay upfront but be ready to negotiate the terms if it helps close the sale. 

2.   Manage clients (Accounts Receivables)

If you must wait to get paid, just make sure you’re managing that relationship. A/R is the money you earned but haven’t received so it’s not yours—yet. Make sure the money is in your bank account before closing the loop. 

3.   Manage inventory

Inventory is another thing that can tie your cash up. It may be a long cycle (time) from buying raw material, assembling them into finished products, marketing them, selling them, and collecting payment. You need to know how much time it takes from the beginning of the inventory cycle to the end. Consider mapping out the cash flow cycle for inventory so you can plan ahead on when and how much to spend at each stage.

4.  Manage seasonality

Seasons and holidays impact sales, fluctuating sales means you’ll need more inventory to cover the ups and downs. Trying to keep up with the appropriate number of employees can be tough. There are many hidden costs for hiring, firing and layoffs. Bear in mind every dollar in inventory is a dollar less in the bank. You can use industry and company historical data to include seasonality into your inventory forecast and budget, in addition to managing cash flow.

5. Create a buffer and plan for the unexpected

Manage the risk before it becomes a threat. When you’re forecasting and budgeting, it’s good to have extra cash as a buffer. You don’t want to be in a position where you’ve allocated every single penny because a small, avoidable problem could balloon into something irreversible. 

Startup founders can’t predict the future, in fact, no one can. If a piece of expensive lab equipment breaks and needs to be replaced right away, or a data breach results in a forced increase in IT spending, it takes money, and more than you might expect. Part of the analysis behind a Statement of Cash Flows is considering the impact of any potential risk, and the effect an unexpected expense will have on your available cash—and ultimately, your ability to pay your bills.

A CPA’s 2 cents

With a Statement of Cash Flows, founders can figure out whether enough cash is being generated, and whether pending payments and inventory are getting too high. It’ll help you see how much cash is getting absorbed and how much is spent when your business is still growing. Cash flow management makes it easier to make decisions and get access to capital investment on property and equipment. It also helps businesses  plan how much cash it needs to rise from debt and raise equity finance.