Oxygen is one of the most fundamental things present in this World as it helps us to exist.
Similarly, when it comes to business/ startups, cash flow carries the same importance as oxygen does for humans.
Many new startup founders/owners ask this question, “What is cash flow and why is it so important?” The quick answer is cash flow is the amount of money coming into a business and the amount of money going out. Think of it as a water tank: water comes in at the top and drains out the bottom. So to keep your tank nice and full, you want more coming in than going out- it is as simple as that!
But it only sounds simple on paper, it quite easier said than done actually.
I started my digital agency 11 months ago and I faced this issue a lot, especially towards the start of my startup journey. At times my startup was on the verge of sinking because we didn’t have good cash flow, but as time passed things improved due to certain decisions and changes that were made intentionally to keep the startup afloat.
Utilizing this experience, I have concluded the following steps that startup owners need to take in order to keep their operations up and running:
Always, be in control of how and when you get paid.
Quite too often business owners get soft when it comes to collecting cash from customers who owe them.
This can lead you to a financial catastrophe.
You want your customers/ clients to “like” your products, services, and delivery, but you also want them to “respect” your financial policies when it comes to paying you.
Introducing a payment policy will speed up the cash coming into your business. Keep your payment terms short to ensure you get paid as soon as possible, and clearly list your terms on all invoices.
As a startup owner myself, I had a monthly payment policy but in some cases, we faced delays in payments from some clients. To overcome this we introduced a 15-day payment policy that boosted our cash flow.
When cash flow is tight, keep a watchful eye on your expenses, including your inventory, and cut where you can.
One area you can apply this by paying bills when they are due. You may be tempted to pay bills immediately, as it will get them out of the way. However, you may end up needing the money that you’d spend to pay the bill, so it’s recommended to wait until you actually need to pay the bill to do so.
Many clients prefer to wait 2-7 days after receiving an invoice to make payments, which means that you’re already going to have to wait to get paid. It’s important that you send out invoices promptly to your clients, as that will shorten the period between making the sale and receiving the needed income.
Make sure to follow up with customers that are having a hard time paying for the invoices.
As a startup owner/ shareholder if your startup is making money, you will be tempted to withdraw more from your cash assets.
THIS IS THE MOST DESTRUCTIVE STEP YOU WILL EVER TAKE!
This is a mistake every 8/10 startup founders make (Even I made it). When it comes to business, you have to understand the concept that business is a third entity and you need to treat it like one.
It is critically important that you have good cash reserves and have a fixed percentage of salary that every shareholder should take. From the business assets, instead of withdrawing re-investing that money is a great idea. You can use it for your marketing or expand in different niche/ areas.
That was all about it, I hope it provided you some value. Please share with your friends if they managing/ running their own startup.
Running a startup is one of the most hectic and difficult things but at the same time, it is one of a kind experience and this experience is only meant for those who dare to go out of their comfort zone to do what they love!
“Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do.”