Managing cash flow in your startup: Best practices

Each year in the UK alone, around 800,000 new companies start up, according to Microbiz Magazine, but only a third of them survive beyond five years.

Those that survive will have a clear mission and vision developed from careful market research, a strong brand and robust financial planning. The latter means securing funding, managing cash flow and developing plans for future growth.

Of course, as the statistics suggest, putting the theory into practice is complex. So how can you ensure your startup gets onto a strong financial footing as soon as possible to maximise the chances of success?

Keeping up the cash flow

It may seem obvious, but if your startup has more cash going out than coming in, it is likely to flounder, quickly. Negative cash flow can make meeting day-to-day operational expenses difficult, disrupt business operations, put off investors and prevent business growth.

In a nutshell, maintaining effective cash flow management is essential for the sustainability and growth of your business and developing and implementing strategies to improve it will increase the chances of long-term success.

Good cash flow management can help by providing:

Operational stability. With cash flowing in more than out, salary costs, rent and bills can be covered without problem, giving your business financial liquidity. Positive cash flow statements will also increase investor confidence if you are looking to secure additional funding.

Growth opportunities. Activities such as marketing and product development are important if you are planning to grow your business, so having the means to invest in these activities will help your business grow

Better debt management. By avoiding large debts, you will avoid high interest rate payments and help your business maintain a good credit rating

Top tips to manage your cash flow

Cash flows can be related to operating activities, investing in assets such as property and equipment, and financing in relation to banking, loans and interest payments.

Knowing your cash position and maintaining a healthy balance between your accounts payable and accounts receivable is essential if you want to grow a sustainable business.

Practices that will help the liquidity of your business and ensure you have enough cash to pay bills, include:

Accurate forecasting. Predicting future cash flow based on what has happened in the past and future market trends can help you accurately forecast potential shortfalls and surpluses.

Prompt invoicing. Automate your invoicing with accounting software, if you can, so invoices are sent out promptly and late payments are chased on the due date. You could even consider incentivising clients to pay early.

Managing expenses. Ensure unnecessary short-term costs are minimised to help maintain a positive cash flow. Regular financial reviews can help identify areas where negotiating with suppliers for better payment terms might help.

Reviewing pricing. If cash flow slips, you may need to increase your prices to keep afloat.

Maintaining a cash reserve. Building a financial buffer against unexpected expenditure will help keep your startup on track and prevent cash flow problems.

Agreeing a line of credit, or overdraft with your bank. The limit you can borrow will likely depend on your credit rating, but with a preset borrowing limit that can be used at any time, you’ll be able to cover short-term shortfalls in cash flow.

Looking for other financing options. Grant schemes may be available to some small business owners in your area, or loans with favourable interest rates, with some lenders offering short-term breaks in repayments when times are tough.

Avoiding negative cash flow

Startups, by their very nature, are prone to fluctuations in cash flow and face unique challenges when it comes to maintaining financial stability. Here are some common mistakes to avoid.

Overspending. Set a budget and stick to it. If the amount of money in your bank account runs low, prioritise spending on essential items. Regularly review expenses and look for cost savings.

Poor bookkeeping. Be organised and keep accurate financial records. Use a professional bookkeeper if you can.

Lack of financial planning. Without financial goals, it’s easy for a startup to run out of money before achieving its aims. Financial targets and realistic budgets are key to staying afloat.

Neglecting taxes and overheads. Financial obligations like taxes are important lines in any financial spreadsheet and if overlooked can break a small business.

Negative working capital. The working capital of your business is the difference between your company’s current assets and liabilities. It’s a useful metric to check in on the financial health of a business. It’s easy to lose sight of your working capital if sales slow, or outgoings increase unexpectedly and if the working capital slips into the red, a business can quickly slump into debt, so close monitoring is key.

Cash flow forecasting

As part of your financial planning, you should regularly project your expected cash inflows and cash outflows and use the cash flow analysis to help anticipate and address any potential cash shortages to maintain a healthy cash flow.

It’s also worth trying to streamline your financial forecasting further with some scenario planning to be prepared for different situations that might arise. This can also help with financial projections and allow you to make informed decisions quickly.

Turn your startup dream into a reality

Entrepreneurs are continuing to shape the business world, with their imagination and drive to innovate and exploit ideas that can change the way we live and work.

But in today’s dynamic and competitive business landscape, building a successful business takes more than entrepreneurship. Behind the brand is hard work, determination and business know-how.

If you are preparing for a senior management role or aspiring to become CEO of your own startup, you may want to upskill to help you navigate complexities in business, drive innovation, inspire teams, and steer towards success in an evolving global market.

The 100% online MBA from Queen Margaret University is designed for busy working professionals looking to advance their careers and deepen their knowledge in strategy, marketing, operations management, accounting and finance, human resource management, leadership, business analytics, and entrepreneurship.