Startup Cash Flow Management: Unlocking The Secrets

Bethany Mullinix
5 min read
Startup Cash Flow Management: Unlocking The Secrets

While well-established companies usually have reliable sources of revenue, startup companies are more likely to see cash flow challenges. It’s not easy for startups to create a steady flow of customers, especially in the early stages, and getting your customers to quickly pay their invoices in full can be an obstacle.

Cash flow is the receipt and disbursement of money within a business. Ideally, a company will receive more cash during a period than it distributes, reflecting positive cash flow. Ongoing positive cash flow allows a company to save money, relying on the surplus during tough economic times or when you want to scale the business. Conversely, negative cash flow occurs your business spends more than you collect from customers.

Fortunately, managing cash flow doesn’t have to be an exercise in futility. You can implement seven simple steps to create an effective cash flow management process that aligns with bookkeeping best practices.

What Is Cash Flow Management?

Cash flow management is simply tracking the amount of money coming in and going out of your business. A sound tracking system allows you to see where you need to improve to optimize your cash flow. 

You’ll use a budget to identify which expenses are necessary and cut those that are frivolous. Then, with appropriate oversight and responsible decision-making, you reduce the risk of running out of cash.

7 Steps To Start Managing Cash Flow

Like any business process, managing cash flow requires you to follow certain steps. You’ll need to establish a budget suitable for your business and then manage your bookkeeping processes so you stay within your desired spending range. Here are the seven steps to consider when managing cash flow.

1. Set A Startup Budget

Your first step is to establish a startup budget for your business. Know your real-time financial situation — how much you’re spending and where that money is going, such as insurance employee and loan payments.

Remember that planning your cash flow isn’t the same as budgeting. Planning for your long-term financial goals is wise, but you need to budget your current revenue to cover what you must pay to stay in business.

Review your current revenue to create a startup budget and subtract standard costs, such as rent, payroll, and taxes. Next, determine the nonfixed expenses, such as your salary, equipment upgrades, and supplies. Finally, if your profits allow, set some money aside for emergency expenses — any unexpected costs.

2. Optimize Your Accounts Payable And Receivable

Your accounts payable and receivable include your upcoming cash disbursements and receipts. Depending on your cash flow and budget, consider whether paying certain bills earlier than their due dates would improve your accounts payable system.

However, some startup owners prefer to wait until an invoice arrives before paying for a product or service — an effort to avoid accounts payable fraud.

Ideally, you’ll want a routine process that minimizes how long it takes to collect money from your clients and maximizes the time you have to pay vendors and other expenses due. Implementing automation can reduce invoice creation time so you can send bills to your customers faster. Automated accounting tools can also help manage your upcoming bills, allowing you to quickly and easily identify when each payment is due.

3. Stay On Top Of Your Bookkeeping

Many businesses make the mistake of falling behind in their accounting activities. For example, they may fail to update their records until after the month ends, making it impossible to have an immediate perspective of the company’s financial situation.

Startups need to follow bookkeeping best practices, and some tips for doing so include:

  • Record all your transactions daily, giving yourself a clear picture of your current cash flow.
  • Keep track of your employees' time for accurate payroll.
  • Organize your bank statements, addressing any inaccuracies.
  • Consult an accountant to ensure you do everything necessary to maintain your business.
  • Utilize automated accounting software to save time and energy with the above tasks.

4. Create A Cash Flow Statement

A cash flow statement is an overview of your startup’s intake and outflow of money. It summarizes how effectively you’re bringing in revenue and how well you’re keeping up with expense payments. Create a cash flow statement, using either the direct or indirect method, to stay on top of changes to your available cash.

If you want to learn more about indirect vs direct cash flow forecasting and management, keep reading here

5. Analyze Your Cash Flow And Begin Forecasting

Once you have a workable cash flow template, start your cash flow analysis to understand the rhythm of your cash accounts, looking at each line item to determine what’s happening.

The first section is cash flow from operating activities, providing information about your accounts payable and receivable. If you’re using the indirect method, it will also give details about non-cash items, like depreciation.

Other sections detail your investing and financing activities, like investments in capital equipment and long-term loans. You’ll use these details for your cash flow forecasting. Ideally, you’ll prepare monthly forecasts for each month over the upcoming year.

6. Cut Your Spending

Think of every cost reduction as an automatic deposit into your business’s bank account. Remember that it’s much easier to dictate your company’s spending than to control your incoming revenue.

But first, establish a few goals before determining where to make your cuts. For example, you might want to increase your available cash by 5% next month or 20% by the end of the year.

Use your cash flow statement to identify unnecessary business expenses. For example, perhaps you have several software subscriptions no one is using, or you’re paying to rent an extra but redundant office printer. You’ll likely need further transactional details to fully understand changes to line items on the cash flow statement.

Once you have your list of unnecessary expenses, cancel them and notify the appropriate parties.

As a startup, you should be especially cautious in monitoring your spending. It’s easy to overspend in the company’s early days, expecting that you’ll need specific services or earn enough money to pay for them. Instead, give yourself time to see how the business performs before making significant purchases.

7. Maximize Your Tax Return

New startup owners can take advantage of several tax breaks to minimize liability. Effective ways to get the most out of your tax returns include:

  • Keeping track of business setup spending, such as incorporation paperwork, accounting costs, and legal fees
  • Claiming deductions for marketing research and expenses
  • Claiming depreciation or amortization costs for equipment purchases
  • Making contributions to 401(k) plans and individual retirement accounts

Find out more with this comprehensive guide to startup taxes.

Importance Of Cash Flow Management

To maximize your startup’s success, be sensible and mindful of your company’s finances. By paying attention and discerning what’s important for your startup, you may quickly see the positive cash flow flourish and support your operations.

Effectively managing your cash flow has many other benefits, including being prepared for unexpected emergencies and future growth. When you’re on top of your business’s finances, investors will likely see your organization in a favorable light.

Is It Possible To Manage Cash Flow On My Own?

It’s certainly possible to manage your own cash flow. However, it’s not always the best path for startup owners. Your best anticipated financial outcomes become reality when you work with experienced financial practitioners, such as a fractional CFO, who can help you manage your company’s cash flow.

Fractional CFO services prepare and analyze your financial reporting, including your cash flow statements. They can explain exactly where you’re spending money and suggest ways to improve the financial health of your business.

Budget Cash Flow For Startup Success

As a startup owner, you have a lot to manage with setting up your business, hiring employees, contracting with vendors, and bringing in customers. With all you have to consider, you may find your cash flow management to be another task on the to-do pile. But it doesn’t have to be the challenge you may have once thought.

Consider automated accounting software to create a budget and manage your accounts payable and receivable. This can help you easily prepare your cash flow statement to predict your income and spending needs.  

With a clear view of your financial goals and plans, you may also find ways to maximize your tax returns. Rather than spending hours toiling over your financial statements, your hands are free to work on what matters — growing your business.

For more support on cash flow management or financial planning, learn more here

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