Running a small business or a startup is one of the most rewarding, but also one of the most challenging things you can do as an entrepreneur. Not only do you have to do your best to get ahead of your competition, get in front of your audience, and provide a great product or service, but you also need to keep an eye on the finances at all times. And finances are just about the biggest problem startup owners face, because according to research, as much as 30% of businesses go belly up because their owners run out of cash.
This means that even though they are great when it comes industry-related knowledge, they often lack sufficient understanding of finances. And when it comes to cash flow, 60% of failed small businesses cite cash flow as the main reason for their demise. This means that it’s very likely a problem you and your startup will face somewhere down the line, so let’s take a look at seven biggest cash flow challenges and how you can avoid them.
- Spending Too Much
While it may be true that your startup needs to invest in new equipment, company vehicles, office, space renovation, rebranding, or even organizing industry events, in all likelihood, all of these are unnecessary expenses, because they are not essential for your operation. They still put a dent in your cash flow though, which can, given a few more unfavorable circumstances, put your company at a risk. Sure, you may be making money, but that money should go into making your company more stable first.
- Not Getting Enough Capital
Getting more cash can be achieved in a variety of different ways, but most startup owners avoid options such as crowdfunding or venture capital, because then they don’t get to call al the shots, which is the whole point of running your own business. Fortunately, getting additional capital is relatively easy if you are willing to consider loans as an option. This is especially true in the case of SBA loans, whose interest rates have never been more affordable.
- Slow to Collect Receivables
If you are constantly finding yourself waiting for that big payment from one of your clients, then you probably need to think about managing your receivables more efficiently. This problem is a lot more common than you might think, because 66% of small business owners say that the time it takes money to process has a huge impact on their cash flow, and as much as 31% of them wait for payment for over 30 days.Solution? Advanced payment, and/or streamlining your internal accounting processes.
- Overestimating the Growth of Your Startup
When your business is doing well and there is huge market for your products, it’s easy to get optimistic about its future and to start making big plans. However, simply following your gut feel would be a mistake if it’s not backed by anything solid. We are talking about going over your financial records and business data and crunching the numbers. If you find that they are supporting your hunch, only then should you start investing your cash into further growth of the company.
- Hiring Too Many People
Investing into great staff is always a good idea, but hiring a dozen people to fill senior-level positions at once might be mistake. First, you might not actually need all of them at that particular time. Second, that’s a dozen of people with sizable salaries which you have to pay every month on time, even though the fruits of their labor will be visible after at least six months or so. Hire only those people which are essential, and channel the rest of the money into your cash flow budget.
- Not Being Aware of Your Revenue
While your revenue may fine now, you need to be able to predict future developments on that front in order to avoid problems with your cash flow. For instance, if a big contract with one of your clients expires at the end of the year and it isn’t likely to be renewed, that sort of thing shouldn’t catch you by surprise, but it can if you’re not keeping track of it, or if you don’t have a good CFO to have your back.
- Not Establishing a Cash Flow Budget
If you take the time to establish a cash flow budget on a daily, weekly, and/or monthly level, you will be able to identify cash flow problems early on and solve them before they can affect your business. Moreover, you will be able to see what’s causing your cash flow problems most of the time, after which you can develop a different strategy that will eliminate that issue.
As you can see, there are plenty of reasons why your startup may run into cash flow problems at some point, but if you are smart about it, you can avoid most of them. From loans to more efficient invoicing, there are plenty of mechanisms you can implement to make sure that your business, and its cash reserves, are safe and sound.
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