Handling the cash flow for your new business is exactly what it sounds like ‒ you’re trying to get the clearest level of visibility into “money coming in versus money going out.” However, managing cash flow is about a lot more than that, too. It’s about making sure that you not only have the funds on hand to remain operational, but that you can capitalize on opportunities as they arise. To properly manage cash flow, it is necessary to prepare for any financial challenges that may develop in the future.
The importance of gaining a precise understanding of your cash flow cannot be overstated.
Indeed, running out of money is also one of the most common ways that new businesses are forced to close their doors ‒ usually very quickly after their initial launch. But while this is certainly an essential topic, it isn’t necessarily a difficult one. Properly managing the cash flow for your new business is a lot more straightforward than you might fear. Keep the following key factors in mind:
The “Breakeven” Point
By far, one of the most important metrics for you to understand about your new small business is your “breakeven” point. That is the point at which your current (or projected) revenues will allow you to meet all of your operating expenses. This is the bare minimum amount of money you need to keep your employees paid, keep your bills up-to-date, and keep your doors open. Unfortunately, it usually changes on a regular basis.
As your business continues to scale, your revenue should increase, but your expenses will increase, too. Therefore, it is of paramount importance that you don’t make finding your “breakeven” point something you “do once and forget about.” For the best results, you should return to this figure on a regular basis to make sure you: a) understand what it is in the literal sense; and b) understand what actions you need to perform to achieve that.
Once you have a handle on your breakeven point, you will, at the very least, be able to remain functioning. This means you can start to devote more of your attention to growing your new business.
The Importance of Cash Reserves
If you look at some of the other reasons why small businesses usually fail, you’ll quickly see that they’re closely related:
- About 79% of businesses fail because they start out with too little money, according to one study.
- 77% run into trouble when they fail to price properly, or don’t include all necessary items when establishing prices.
- 73% fail because they were either too optimistic about achievable sales, or about the money required to generate those sales, or both at the same time.
These types of issues are common with small businesses, and particularly with those controlled by an entrepreneur who is running their first small business. As much as all of these ideas ultimately tie directly back into cash flow management, they also underline another very important best practice:
The Value of Maintaining a Cash Reserve
- Absolutely every new business, regardless of its size or the industry it’s in, should expect problems on a regular basis. Working hard to keep a quality cash reserve will not only help to reduce the ultimate impact of those problems, but it can also help reduce stress and distractions too.
- If you have no cash reserve, every problem becomes a major cash flow problem. If, at the very least, you have something to fall back on, you will have the clarity you need to learn from the situation, maintain your focus on growing your business, and keep moving forward.
Take Control of Those Receivables
Typically, new businesses do not have a problem with the “money out” side of cash flow management. Even if business leaders do start to spend money too quickly, hopefully, they are able to recognize it so that they can make adjustments as soon as possible.
But it’s difficult to make adjustments if you’re not bringing any money in, which is why taking control over your receivables is so important.
For example, if a client owes $1,000, but you have no idea when they are going to pay it, do you really have $1,000? No, not really ‒ which is why you should try to make invoices “due immediately.” If someone needs additional time to pay, try to make sure the terms give them no longer than a week or two at most.
Depending on your specific circumstances, you may even want to offer discounts for clients who pay early. This can be a great way to incentivize them to pay their invoices and get essential money into your bank account.
At a bare minimum, you should have a staff person tasked with maintaining visibility into receivables and this employee should follow-up with clients who have outstanding invoices.
The more money you bring into your business, the more money you can spend on those initiatives that will continue driving your organization forward.
Every Dollar Spent Has a Purpose
Everyone knows that you should only spend money on essentials, but in the fragile early days of a new business, you need to take that concept one step further.
With every purchase you make, you need to be able to see the verified return on investment that it will bring. For example, if you’re buying a new piece of equipment, what does it get you? Will it speed up your production, allowing you to more quickly achieve a larger volume of higher quality finished products? In that case, the return on investment absolutely justifies the initial money you need to spend.
However, if you really want that new piece of equipment simply because it’s the “latest and greatest,” that isn’t really the “good idea” you thought it was.
Another example of this would be investing in a new payment solution that allows you to accept online payments. It may not be a “fun” purchase, but if it allows you to expand into a true e-commerce solution and if it creates new opportunities to introduce your products to a larger audience and sell them online, it becomes an “essential,” and is a step worth taking.
In absolutely no uncertain terms, you cannot afford to spend money “just for the sake of it.” Determine your essentials and make sure you have the cash on-hand to support them. Then, eliminate the costs for any non-essentials, at least until your business is in a fully profitable state.
In the end, remember that you need to be proactive about properly managing your cash flow. Not only do you need to know your current cash flow status at all times, you also need a clear plan and “line of sight” where you’re headed tomorrow. When everything is functioning as it should, your cash flow best practices support the former while making the latter possible. If they aren’t, there could be a serious issue with your current process that you should find and eliminate as quickly as possible.
If you have any questions, or need assistance managing your cash flow, please contact us.