Businesses need cash to survive, but many owners don't know how to manage their flow of money. This is a problem because if they run out of cash, their business will fail.
Running a business entails more than simply making a profit--you have to be able to manage your cash flow, or else you'll find yourself "underwater."
Even if your business is doing well, you might still experience a cash crunch from time to time—especially during your first few years in operation.
Use these 5 strategies to increase your cash flow and decrease the chance of bankruptcy:
1. Getting Professional Support
Many new business entrepreneurs think they can save money by managing their own finances, but this couldn't be further from the truth. Managing cash flow is a massive time-suck, and it's much too complex and critical to your company's success for you to try to handle it on your own. In fact, one of the first employees you should hire should be a bookkeeper or financial manager.
Consider paying for a bookkeeper from your own pocket, even if you have not yet earned revenue. Effective cash-flow management is crucial and should be done properly from the beginning. All of your company's financial and tax strategies rely on strong cash-flow management.
At first, it might take some time and money to hire a highly experienced bookkeeper with whom you can build a strong relationship. However, the payoff in terms of your financial strategy and tax savings will more than make up for the initial investment. I know some great referrals for experienced, trustworthy bookkeepers and CPAs here in the Coachella Valley—if you need some guidance, don't hesitate to reach out. Your business will thank you later.
2. Implementing Financial Systems
Above all, effective cash-flow management requires sound systems. If your company’s financial systems and processes are not set up the right way from the start, even a skilled bookkeeper won’t be able to magically fix them.
As your business attorney, we focus on supporting startups to set up effective financial systems. We will help you put the proper systems in place to manage your cash flow and ensure your company has a rock-solid financial foundation that will not collapse when the going gets rough.
3. Monitoring Your Accounts Receivable Closely
A lot of startup businesses have money troubles because they don't keep track of their accounts receivable. We've seen this happen too many times to count, and we made the same mistake when we first started Palm Desert Law Group, APC.
In order for your business to function properly, you must ensure that customers pay you on time and in full. Accounts receivable that go unpaid for too long run the risk of being forgotten and not collected.
Your bookkeeper should keep track of all accounts receivable and include them in monthly financial reports. This will not only allow you to stay aware of your company’s financial health, but it can also give us more information if and when collections become necessary.
4. Getting Paid Upfront
You can increase your cash flow and get rid of the stress that comes with accounts receivable by asking customers to pay their bills in advance when possible. This is a good idea, especially if you have clients who often don't pay on time. You can encourage this behavior by providing a small discount for those who pay using a check or ACH bank transfer. That way, you're paid in full, your clients save money, and you don't have to worry about credit card fees. Everyone wins!
If you can't ask for the full payment upfront, request a deposit at the bare minimum to help with cash flow. Also, have a strict policy in place for late payments, and make sure it is included in all your sale agreements. The key here is to be consistent with enforcing this policy across all clients.
5. Maintaining a Cash Reserve for Bad Times
Almost every new business will experience moments where they fall short on revenue, and your company's chance at success hinges on how you manage these times. To protect your firm from difficult patches that are bound to happen and unexpected emergencies, keep some cash aside—even if it's just access to a line of credit.
Picture this: it's the end of the month, and you're eagerly awaiting your company's revenue to come in so that you can pay yourself and your team. But then, unexpectedly, nothing comes in. You have no reserve to fall back on and suddenly find yourself scrambling to cover payroll—and desperate because of it. This situation not only puts a huge damper on morale but also stunts growth. To prevent all of this from happening, having a reserve is key!
Boosting Your Startup Cashflow
No matter how much passion or talent you have, your startup will not survive if you can't manage your cash flow. However, you don't need to be a financial mastermind to keep the money coming in. You just need the right system and support infrastructure. Luckily for you, we specialize in both areas.
This post forms part of our Small Business Series and to access the other in-depth articles, please visit the links below.
7 Tips For Creating A Winning Business Plan
How To Choose The Right Entity Structure For Your Company—Part 1
How To Choose The Right Entity Structure For Your Company—Part 2
How to Grow Your Business for Sustainable Success in 2023
5 Best Practices For Establishing Healthy Boundaries With Clients
6 Essential Strategies For Starting A New Business
Putting Your Kids On The Payroll Can Benefit Your Business AND Help You Save Big Money On Your Taxes
3 Red Flags To Watch For When Dealing With Problem Clients
5 Strategies For Boosting Your Startup Business’s Cash Flow
In our LIFT your Life and Business sessions, we will determine the areas in your financial systems that need improvement and suggest additional methods to build up any weak spots in your company.
When we meet for a LIFT your Life and Business session, we will assess your current financial systems and advise you about additional ways you can shore up any weak spots in your company’s foundation. Getting a handle on your cash flow will prevent your startup from running out of money, and it will also free up your time and energy to focus on the big-picture responsibilities needed to ensure your business truly thrives. Contact us today to get started.