Why good cash-flow management is vital for start-ups
These five steps could help your business manage any cash-flow problems that arise
Managing the cash that flows in and out of your business is an important part of the finance function and when it comes to start-ups, it could be the difference between the success and failure of your company. You may be doing well on sales, and you could even be showing a profit at the end of each month, but if the cash from those sales is not flowing into the business quicker than it is flowing out on costs, then you will inevitably have cash-flow issues. Cash-flow management is essentially all about encouraging people to pay you as soon as possible and delaying paying people for as long as possible. Here are five tips to help cash-flow management.
1. Create a realistic cash flow forecast and don’t focus on profit
The best way to estimate your cash flow and prepare for the coming months is to create a realistic cash-flow forecast on a monthly, quarterly and yearly basis. So have a cash-flow forecast from day one that covers expected sales and expenses for each month. The forecast will allow you to keep track of how much cash you have at any point in time, how much is due in from sales you have made and how much you are planning to spend on wages and other expenses in the period. An up-to-date cash-flow forecast will also tell you if there are any periods where you may start to run out of cash and help you to see what changes may need to be made. Remember, profits don’t equal cash flow, so don’t focus on how profitable you are at the very start. There will be plenty of time to obsess about your gross profit and net profit margins as the company develops.
2. Look for part payment and deposits up front
One way to manage your cash flow better is to seek up front or part-payment from customers whenever possible.This obviously helps with your cash position but it also cuts down on the customers you may need to chase for payment. Incentivising customers who make their payment early by offering a discount on the price can work well, but you do need to ensure you build any discounts into your cash-flow forecasts. Forgetting to take account of a 10 per cent discount for early payment can have a big impact on your cash forecast.
3. Use the available technology
The days of stand-alone accounting packages that reside on one desktop computer in the office are long gone. Thanks to cloud-based accounting software, the control is now back in our hands and we can now view all our accounting information when and where we want, send invoices directly to customers from the system, chase payments and make any payments on invoices due. Most systems now offer a direct import of your bank transactions so it’s never been easier to track the cash flows of your business. All start-up companies should be making use of a cloud-based accounting system, enabling them to see their cash-flow situation at a glance and closely monitor receivables and payables.
4. Separate bank account for taxes
It is always recommended that you have two bank accounts for your company – one for the cash that you use for operating the business on a day-to day-basis and one for the cash you set aside for payments to Revenue to cover VAT, payroll taxes and other taxes that are payable on a regular basis. By using two accounts, you can see exactly how much money you have available to the business at any given time and it avoids any surprises when the time comes to paying your VAT and other taxes to Revenue.
5. Good credit control
Your company should have a good credit-control system in place to make sure that money that is owed to you is paid on time. Make sure that your payment terms are clearly outlined for customers at the start of the relationship and that invoices are sent out in a timely manner. You need to stay on top of payment schedules to make sure that you are paid when it is due.
Even if you have to work with a smaller number of clients in the beginning, if you know they are reliable and quick to pay, it could be worth it. Managing your cash-flow may seem like a time consuming exercise but it’s worth the effort to track your cash very closely on a daily and weekly basis. For start-ups, cash is most definitely still king and being able to tell what the company cash balance is today and what you expect it to be in six months time should be a priority from the very start.
Johnny Harte is a chartered accountant and works with start-ups and early stage companies on all aspects of the fundraising process