Cash flow optimization is the process of regulating the burn rate to ensure an extended and safe runway period. Startups are almost always cutting closer to the edge, so it’s always useful to have a number of fail-safe strategies up your sleeves.
For a startup to be successful, it is imperative to have a compelling product and coordinated team that initiates maximum sales, but there is one thing that most CEOs tend to sideline which is very vital for the survival of the startup—creating a reliable cash flow system. This is sometimes even more crucial than their ability to deliver.
Research shows that 82 percent of businesses are forced to shut shop because of their inability to raise funds to feed the increasing valuations. Alarming as it maybe, the good news is that it can be averted with smart financial management.
CEOs must be alert enough to:
- Understand cash flow, plan, identify risks, look for ways to mitigate them and try to raise cash to match the milestones.
- Analyze cash flow and spot problem areas.
- Develop a cash flow budget to understand the pattern of cash flow for the coming months/year.
- Improve cash flow by accelerating inflow and delaying outflow.
- Borrow money when needed to fill cash flow gaps.
- Invest surplus cash to make profits.
All these bring home one point: good cash flow management is of primary importance. This can neither be ignored nor delegated to anyone else. As an entrepreneur, one should have a sharp eye to limit unanticipated payment delays and unplanned cash outflows. If this balance can be maintained, the company is bound to survive. Sounds simple, but is practically quite a daunting task. Let’s take a look at 5 simple ways to optimize cash inflow:
- Keep a watch on the cash flow management. Stop focusing too much on the profit. Rather, spend your energy by keeping an eye on the cash flow vs. spending.
- Making your invoices in advance so that your customers have no excuse for late payments. If possible, make them “due immediately” and not extendable beyond 15 days. Follow up on the outstanding invoices, sometimes by collection services if the situation demands. Save your spreadsheets with utmost care; if possible use cloud storage so that information can be accessed anywhere, anytime.
- Don’t extend free trial offers to create a strong customer base. This does not work in company’s favour always and the loss incurred in the process and cost recovery is not easy.
- Have a clear budget and be accountable. Make sure that each expense is valid and necessary. Hire an accountant or a CFO to make things easier. Resist the temptation to hire multiple employees.
- Be prepared for fluctuating seasonal sales, unanticipated expenses and emergencies. Sometimes, even a regular customer can delay payment, bankers may withhold funds just when you are in dire need or unexpected growth may call for additional amenities. Always be ready with plan B. If necessary maintain a cash reserve.
Running your business without paying attention to cash flow is like paddling upstream with an oar. You will either not reach your destination or be so exhausted upon arrival that you will have no stamina to carry on further.