In the startup world, a commonly cited statistic is that 29% of startup failures can be attributed to running out of money. With all that building and running a startup entails, founders may not be tracking their money the way they should and are caught off-guard when the runway disappears out from under them. This doesn’t just apply to early-stage, seed level startups – it can happen to big raisers too. If you don’t effectively manage your cash flow, you’re setting yourself up for problems down the line, regardless of how much money you’re able to bring in from investors.
To avoid the cash flow problem, startups need to be strategic about how they’re spending and managing their money. Here are seven tips for how you can keep your startup’s cash flow moving in the right direction.
1. Calculate your breakeven point
Knowing your breakeven point (the point at which revenues are equal to costs) can help you better understand how you should budget and where you should be spending your cash in order to reach that point.
There are a couple of ways you can calculate your breakeven point, depending on your business model. You can either figure out how many units you need to sell to breakeven or how many dollars in sales you need to make to reach that point.
To calculate breakeven point in units:
Breakeven units = Fixed costs / (Sales price per unit – variable costs per unit)
To calculate breakeven point in sales dollars:
Breakeven sales dollars = (Sales price per unit – variable costs per unit) / Sales price per unit
2. Understand cash flow vs. profit
While profit is important, profit is not the same thing as cash flow. Cash flow is made up of debt, accounts receivable, inventory, accounts payable, and expenses. In order to generate a profit and grow your business, you need positive cash flow. You need enough incoming cash to pay your employees and deliver your goods or service.
3. Keep a rainy day fund
Business and market conditions can be unpredictable. It’s prudent to keep an emergency cash reserve for any unforeseen circumstances that may come your way. They can cushion you in times of turbulence, helping you to stay focused on the day to day business operations.
4. Get help
You may not be an expert at managing money, and that’s okay. Proper money management is time-consuming, and with so many responsibilities already on their shoulders, founders may not have adequate time or expertise to devote to the task. Depending on where your business is at, there are a couple of different ways you could delegate money management. Options include contracting an accountant, bringing on a CFO, or designate a team member you trust with keeping an eye on cash flow. Investing in accounting software can also make cash flow monitoring easier and more organized.
5. Get your money ASAP
The sooner you’re able to get the money you’re owed from customers, the better, whether this means automating charges or marking invoices as “due immediately.” Someone on your team should be responsible for tracking receivables.
6. Spend wisely
Forecasting is important because it can help you get an idea of what resources you will need down the line and how best to allocate your funds. Outside what you know you will need to purchase, it’s in your best interest to minimize non-essential spending until you’ve reached profitability. This means being honest with yourself about business wants and needs. A new office space or gadgets for the team may be nice to have, but they aren’t technically essential.
7. Hire strategically
For startups, hiring often presents a sort of Goldilocks Dilemma. Hire too many people in the beginning, and you may be biting off more than you can chew. Wait too long to hire, and you may start dropping the ball. As you start bringing on more help, it can be tempting to just get roles filled. However, long-term, you’re better off holding out for the right talent. You may have to spend more on salary and benefits for a higher quality candidate, but long-term it will save you the time and money of bringing on cheaper, less skilled staff.