A brand new startup is in search of one thing, improved cash flow. Having a positive cash growth leads to plenty of opportunities like more profit (obviously), fuel for growth, and appeal to investors.
Unfortunately, if you are not careful, you can bleed cash quickly, sometimes without even noticing.
A lot of work goes into continuously growing cash, so to help you out, we put together a list of the 7 levers for driving the flow of cash. Check them out below:
1. Actually Track Cash Flow
It might sound like common sense, but actually tracking is something a lot of startups skip out on. Cash is the lifeline of your business and it’s probable your reporting is centered around the required pieces to determine your cash flow. Utilizing these reports allows you to track how well specific metrics are performing and make adjustments to improve cash reserves.
Here are some metrics you should consider tracking to help improve your flow of cash:
- Working capital (essentially your available cash less what you need to pay to others)
- Forecast variance
- Liquidity ratio
- Accounts receivable
- Day says outstanding
How regularly tracking improves cash:
Because cash flow is the driving force of success in your business, regularly tracking the metrics that affect it will improve your cash flow. These metrics are indicators of where you are doing well, or where you are doing poorly in your business. By regularly tracking, you can regularly make adjustments to keep your cash flowing in a positive direction.
2. Stay on Top of Accounts Receivable
One of the metrics you should be regularly checking is accounts receivable. If your accounts receivables are out of whack, your cash position will be too. To help combat a potential slip-up in your accounts receivables you should ensure timely collections.
Further, the longer a payment is past due, the more likely you are to not receive the payment. Try keeping a detailed list of what you are owed and what is past due so that you can factor it in when reviewing your cash status.
How accounts receivable management drives cash:
High numbers in accounts receivable can make it look like you have more money than you actually do. This is why you need to know what is owed and when so that you can factor it into your cash flow to get the most accurate depiction.
3. Stay on Budget
Staying on a budget might also sound like another common-sense tactic, but straying away from your budget is often the reason for negative cash flows. When you create a budget, your focus is to max out on revenue and minimize expenses, this typically means spending less and providing more services.
Your budget is created on realistic expectations of spending and can be adjusted if things are less or more costly than anticipated. It is important that you stick with your budget and time big expenses to keep a more consistent positive flow of cash.
How expenses impact cash flow:
Revenue and expenses work hand-in-hand in determining the strength of your cash flow. An abundance of expenses, specifically the unplanned or areas of overspending, often leads to a decline in cash flow. Sticking to your budget will help you spend appropriately and keep your cash flow on track.
4. Cost of Goods Sold (COGS)
As a startup, you likely have contracts with vendors, partners, or both and are probably outsourcing raw materials, cost of goods sold and hosting/server spaces. These are not cheap, often taking up a lot of room in your expense column.
You should spend time getting to know your contacts so that you can negotiate a lower cost when possible. It’s also important you pay on time (but not late) as a delayed payment can affect your cash flow in a positive way so long as you don’t incur late fees.
How COGS drive cash flow:
COGS are typically recurring expenses and as we mentioned earlier these greatly affect your cash flow. On one hand, because they are recurring you can plan for them on your budget and take them into account when determining your cash flow.
On the other hand, a missed payment or change in due date can look like you’ve spent less than you projected, inflating your true cash flow amount. It is important you pay attention to these and ensure you are keeping everything up-to-date and accounted for.
5. Pricing Analysis
If you are still looking for ways to improve your cash flow after you’ve checked your accounts receivable and spending habits, there is a chance your pricing or marketing are not doing their job.
You may have priced your products too low or too high, are missing the mark when it comes to consumer demand, or are targeting the wrong market. Any of these instances means it is time to reevaluate your price points or marketing tactics by running a pricing analysis.
How pricing analysis impacts cash flow:
Diving deep into the way you are pricing and marketing your products is an often overlooked key to maintaining a positive cash flow. When things are going right in other areas but cash flow doesn’t seem to follow suit, this is often where you will need to make an adjustment. Once you have found the appropriate balance between your COGS and the price of your product/services you will see a rise in your cash flow.
6. Payroll & Headcount
For startups, not having enough people can slow progress and even hurt cash. On the flip side, having excess resource capacity can hurt the flow of cash if those resources aren’t generating revenue. With an influx of work, you need to be sure you have the hands to get the job done to keep income flowing.
That being said, startups sometimes have a lot of ups and downs, which can lead to periods of being both understaffed and overstaffed. . If that is the case you may need to consider:
- furloughing workers
- temporarily reduce salaries(try offering equity compensation instead)
- reevaluate executive compensation
- reduce or eliminate contract staff
How headcount drives cash flow:
There is a chance you have an abundance of work and need more employees to keep up with your rapidly growing startup. In that case, you will need to hire more employees with the hope they will be able to serve the customers, keeping you on the path towards higher cash flow. However, be careful and make sure you’re factoring these additional hires into your budget to avoid overspending.
Inversely, you may have too many employees, meaning you are shelling out too much money with little revenue in return, draining your cash. Keep a close eye on your headcount to the amount of work ratio to ensure you are getting optimal cash flow.
7. Use a Startup Focused Accounting Partner
Finally, consider using a startup-focused accounting partner. Founder’s CPA understands fast-moving startups and centers their work around enabling you to grow. Your cash flow will grow steadily when you have an accounting partner who understands your needs and is striving to meet them.
Working with an experienced partner delivers the right information, quickly, helping you make data-backed decisions you can trust. Click here to schedule a free consultation with Founder’s CPA today.