Understanding and managing your cashflow is vital to running a successful startup. In order to do this effectively, you’ll need to be aware of what money is coming in and where it’s going out to.
Cashflow management means ensuring the amount of money coming into your business is always larger than that going out.
Ineffective cashflow management is among the top reasons over 50 per cent of British startups fail within their first five years. A sudden cashflow shortage can lead to overdrafts and credit fees that you may never be able to pay off.
Avoid a cashflow emergency by following these simple steps:
1. Be punctual and accurate
Always submit your invoices promptly in order to increase your chances of a quick turnaround and to get into good habits with your clients. If you always get the invoice to them on time, it’s more likely they will respond by paying you on time.
Don’t let silly mistakes cause delays on payments. Make sure everything is perfect before you send the final invoice. Around 50 per cent of cashflow issues are caused by poor correspondence; don’t encourage it.
2. Monitor your cashflow
Be vigilant with any late deadlines and always chase up anything that has fallen behind deadline. Proactive reminders shouldn’t offend your clients and will avoid any really nasty issues if things get out of hand.
Using a cashflow forecast will help you stay on top of the money flowing in and out of your business and keep tabs on what invoices need paying and when. Revisit this regularly and consult it before you make any big decisions pertaining to your business.
Read about other ways to manage your cashflow effectively:
Get a grip! How to avoid the pitfalls of cashflow management
How business charge cards could optimise your cashflow
Cashflow – not profit – should be your top focus
3. Cover yourself with a contract
Contracts allow you to set out all payment expectations clearly and concisely. This is also your opportunity to outline any interest you may charge on late payments. For larger clients you may also want to charge a deposit.
Charging a deposit is a great way to get some cash up-front, it’s also good insurance if a deal falls through (just make sure you’re not contractually obliged to return the deposit in this event). Deposits can also act as rudimentary credit checks. If a client can’t produce a small deposit, it could also signal difficulty to pay the full amount when the time comes.
4. Prioritise
If you do find yourself with cashflow issues, don’t panic. This is not unusual for small businesses and there are ways to tackle the situation and lessen the impact.
The first step to damage control is to assess your cashflow and prioritise your payments accordingly. Clever planning will stop you falling into a debt cycle and help you get out of any tricky situations as quickly as possible. Remember: always go back to that cashflow forecast before you make any big money-based decisions.
Sophie Turton is the assistant editor at Crunch Accounting.
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