It’s important to keep a close eye on your burn rate and maintain a cushion of cash. You also want to be sure that you are sending invoices promptly and following up with customers that owe payment.
In addition, you can try to improve your cash flow by offering discounts for early payment. Another option is to negotiate payment terms with suppliers.
1. Make a Budget
A budget is a necessary tool for startups because it will help you determine how much capital your company needs to cover expected business expenses. Without a budget, you may run out of cash too quickly or spend money inefficiently.
A good budget should include both estimated funding and estimated costs. You should also add in your startup losses to understand how long it will take for you to break even.
If you aren’t sure how to make a budget, there are many online resources available that will walk you through the process. You can also use automated accounting software to create a budget and track your spending and income. It will save you time and make your bookkeeping easier. It will also give you the data you need to share with investors and lenders.
2. Get Funding Early
Cash flows in and out of your business every day, so managing it involves a delicate balance between revenue and expenses. A solid cash management strategy includes tracking the break-even point for your business, which will give you goals to achieve and a ready-made target for forecasting where your money should go. It also includes negotiating payment terms with suppliers and using credit cards to postpone payments.
It’s important to get funding early, which will give you a solid cash reserve that can last for several months. This can help you avoid the common pitfalls that lead startups to run out of cash, such as having to forgo paying themselves or using personal credit card debt. It’s also a good idea to look into other financing options like lines of credit, business loans and invoice factoring.
3. Automate Payments
The last thing a startup needs is to spend more money than they have coming in. This is why a strong accounting system is essential for managing cash flow effectively. This is where technology like accounts payable automation comes in handy. It makes the tasks of invoicing and payment tracking more efficient, while ensuring thorough records are kept for future reference.
Another way to manage cash flow is to invest excess amounts of money that you do not need for daily operations into short-term, low-risk investments that generate higher yields. This might include Treasury bills, money market funds or even a CD account with a higher interest rate. You might also consider working with a treasury management service to optimize your investment strategy. They can help you create bond ladders and find lower cost investment options.
4. Keep Track of Your Expenses
Running out of money is a major reason that new startups fold soon after they launch. But, this doesn’t have to be your business’ fate. With smart strategizing and a strong grasp on how to manage cash flow, you can save your business from failure.
One of the best ways to keep track of expenses is through business expense management software. These tools help you create a budget, record expense deductions correctly, and identify cost savings for your company. They also make it easier for your employees to submit expense claims and get reimbursed. Using an accounting system that offers real-time expense validation will give you a rolling oversight of all of your company purchases. Moreover, it will help you keep a close eye on your burn rate.
5. Set Up a Cash Reserve
A healthy cash reserve is a great way to help your business weather financial emergencies, unforeseen revenue dips, and more. A cash reserve can also help your company navigate seasonality and other more predictable revenue fluctuations.
To determine how much of a cash reserve you need, you can look at your business’s historical expenses and earnings. By analyzing the previous year’s cash flow statement and subtracting expenses from total revenue, you can find how much you need to save in your reserve each month.
Setting aside a large amount of money in one go may feel overwhelming for you and your startup, so try to set small, manageable goals each month. This way, you can build your emergency fund over time. Ideally, your savings should be kept in an easily accessible and highly liquid account.