Are you looking into a way to prevent cash flow problems?
Cash flow problems are probably the number one killer of businesses big and small. Not even the largest mature corporations can escape this.
Early-stage startups and small businesses can be even more at risk of failure with even less changes and support of big banks.
Risks Of Running Into Cash Flow Problems
As we share with members of Impakt Tribe (where we help startups from A to Z with everything related to fundraising), closing your business is the biggest and most obvious concern and the result of cash flow problems. That doesn’t necessarily have to be the end of a company, but it isn’t the most desirable outcome.
As the founder or CEO, your business may live on, but there is a good chance you won’t be a part of it anymore in this scenario.
There are many other side effects too. The staff is a big one. Cash flow shortages usually show up in not being able to pay the bills or pay people on the payroll first. You might be able to delay some bills down the road for a couple of weeks or months, but your employees aren’t going to wait long without being paid.
Some will leave and will leave their experience online for others to read in reviews. If your best team members go to work for your competition, you are going to be at a major disadvantage.
Keep in mind when wondering how to prevent cash flow problems that, eventually, suppliers and vendors will get tired of late payments, that is not good for their business and cash-flow..
Startup fundraising can be impacted too. You can imagine that as an investor it is a lot more attractive to fund profitable businesses. Coming in with rescue funding for a company that is losing money and on the brink of disaster is high risk. If they do invest, the terms certainly won’t be as appealing as if you were in a strong financial position.
Then there are the lost opportunities. Without extra cash, you can’t go for any new opportunities to grow. This can create a dangerous downward spiral.
This is all beyond the stress which can steal your passion for your business and impair decision making.
So, how do you prevent cash flow problems?
Begin By Building Revenue
It may not seem very trendy to launch a startup focusing on income and profits anymore, but it makes a lot of sense.
If you begin with revenue, you have cash flow. If that falters you can still raise money, but you have a working business model which is the far most sustainable way to survive with your business in the short and long run.
Raise Equity Instead Of Going Into Debt
Business loans, lines of credit, credit cards, and taking terms on invoices are common ways to fund businesses and startups. It can work spectacularly. Though it does come with extra risk and something to look into when figuring how to prevent cash flow problems.
Debt means repayments and interest. Typically, no matter whether you are making money or not, you are expected to make regular repayments. Fall behind and the penalties, fees, and occurring interest just makes it harder to catch up.
Consider raising startup capital through equity fundraising instead. You give a piece of your company in exchange for the money you need. If the business is performing well and cash flow is plentiful, everyone gains more. If cash flow is interrupted, at least you don’t have to deal with collectors and defaulting debt as well.
Raise Capital In Advance Of Your Needs
If you are asking yourself how to prevent cash flow problems., don’t wait until the last minute to raise capital. The closer you are down to the wire, and the less financial runway you have, the worse the negotiating position you are in. The reverse is also true.
The stronger you are financially and the more free cash flow you have, the easier the round will be to raise, and the better the terms for you.
Even before your fundraising campaign goes live you need to be building relationships with investors. So, get started.
Raise More Than You Think You Need
When you do raise money, raise more than you think you need. Everything notoriously costs more than you expect and takes longer than you plan. Don’t come up short.
In fact, experienced investors will tell you to raise and accept investment when you don’t need it.
You can imagine how relieved all the founders are who raised money just before COVID 19, versus those looking back and wishing they had done so a lot sooner.
Take A Minimalist Approach To Overhead
If you don’t absolutely have to have it to operate, then don’t sign up for it.
That can apply to office space, salaries, inventory on hand, company cars, and subscriptions. Try to avoid those fixed costs.
When you do need it, consider creative ways to minimize new demands on your cash flow. For example, offering key hires equity and options instead of a large salary and perks.
Don’t Get Ahead Of Yourself
The media loves stories of scale, but there are times for sprinting toward growth, and times to secure your position and finances. This is a good point when looking into how to prevent cash flow problems.
Be wary of stretching too far in expanding and taking on bills during some phases of the cycle. Be quick to right-size when the market calls for it.
Multiple Streams Of Income
If you only have one source of cash flow and that gets interrupted you can be in big money trouble fast. Whereas if you have multiple sources of revenue you may enjoy more consistent and resilient cash flow over time.
Cash Flow Projections
Cash flow projections are some of the first financial models and forecasts you work on as an entrepreneur. Then make sure you track and identify potential issues so that you can get ahead of them.
Please let me know in the comment box below which cash-flow strategy you picked up here and going to implement.
Thank you in advance for sharing your thoughts.
Your biggest fan,
Jeroen van der Heide
Co-founder & Ecopreneur
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