Cash flow is a crucial ingredient to the success of your startup. Not only does it help you predict when your company will break even, but it will also help you determine when you’re in a position to amplify your efforts to grow your company, such as hiring new employees or renting office space.
Many startups struggle with managing cash flow as it involves careful and deliberate tracking of expenses, invoices, and sales.
Here are some tips for improving cash flow and getting your company on the solid ground it needs to succeed.
Startups Have Unique Financial Needs
Startups often wind up in an unusual financial position. Many cannot qualify for traditional bank loans due to the inability to show sufficient cash flow to repay them.
Instead, they tend to opt for alternative financing methods. In order to attract investors willing to take a risk on the company, its founders must be able to demonstrate that the company is viable and will be around for the long haul.
Cash flow should be managed in a way that allows your startup to grow while keeping it solvent so that your obligations can still be met. If you miscalculate, it can lead to serious problems when it comes time to repaying loans, abiding by conditions for financing, and even keeping up with payroll.
Calculating Startup Cash Flow
You need to know your cash flow calculations to understand what’s coming in and going out of your company. The easiest way to figure it out is by subtracting expenditures from income.
The types of income to include in your calculation includes sales, investments, bank loans, and other types of funding, such as grants. Expenditures consist of staff salaries, operational costs, taxes, and the repayment of your loans.
6 Ways to Improve Cash Flow (Specifically for Startups)
No business owner wants to hire an employee or rent a new office space only to discover later that they don't have enough money to support the decision long-term. Improving a startup's cash flow requires careful planning and creative solutions. Here are six tips specifically focused on helping startups to improve their cash flow.
1. Plan Early and Project Weekly
Cash flow planning can cover a few weeks or even a few months. Planning out projected expenses and revenue as far ahead as possible is important.
However, new companies often do not have a predictable sales pipeline or previous years' data to use as a guide. By projecting your running cash flow every week and taking away net outgoings from net income, you can keep a running total that helps you develop a more accurate cash flow forecast over time.
2. Invoice on Time
You must send invoices to customers as soon as you’ve rendered services or even before services or products have been purchased (if you use a subscription-based model). Delayed invoices can result in customers forgetting and ignoring the bill, disrupting your cash flow.
Likewise, if customers know they can pay their bills late with little consequence, they generally will. You can implement late fees to avoid disrupting cash flow caused by delinquent payments.
Offer Discounts for Early Payments
Customers will be willing to pay their bills early if you offer a small discount. This keeps late payments to a minimum while preserving cash flow.
3. Spend Slowly and Conservatively
Startups can get into a cycle where they pour so much money into delivering their product or service as quickly as possible that their expenditures overshoot their revenue, forcing them to scale back or even look for additional funding through loans or equity financing.
By managing expenses through slow and conservative spending, startups can avoid overspending and instead focus on preserving their cash flow.
4. Hire Only When Necessary
As your startup grows, you may be tempted to add staff. However, this can significantly strain cash flow if not managed properly. Hiring should only occur when necessary and with an onboarding plan in place. . It is essential to have a precise analysis that shows not only why you need to add a member to your team but how this employee will produce results, with 30-day, 60-day, and even 90-day benchmarks for where they need to be in their training. Smart hiring practices should include considering the cost of benefits and on-the-job training time, as well as the revenue potential that each new hire brings to your business.
Instead of hiring new staff, many companies protect their cash flow by outsourcing specific company duties. This often allows them to take advantage of lower costs, as they will not have to pay wages and benefits for an in-house team or maintain the equipment needed for the work. Additionally, this can help with cash flow projections as payments for outsourced services are often made through a subscription or a fixed fee, as opposed to the variable hours an employee spends on the clock.
5. Finance Your SaaS Vendors
One of the biggest expenditures a startup will make -- aside from personnel -- is on the software they need to run their company. Most SaaS vendors offer their products and services through a subscription model, in which companies can pay upfront or break the cost of the services down into monthly payments.
Vendors often offer discounts to those who can pay for their subscriptions upfront. However, the problem is that many startups do not yet have the cash flow to afford a lump sum payment to get the discount.
Gynger allows startups to take advantage of the discounts from their SaaS provider by providing a loan to the company, without impacting their cash flow.
How It Works
Gynger will pay your software vendor's full contract value upfront. You can then repay us through a payment model that works for you.
This allows you to invest in new software to scale your business without burning your budget or having the expenses deeply impact your cash flow. You can predict your cash flow more accurately by spreading out the payments for all your software vendors.
6. Use Idle Cash to Grow
Idle cash is either physical cash you store at your company or deposit in a non-interest-bearing account. Because the cash is not earning interest, it's not appreciating as it should, and the value of that cash can’t decline due to inflation. The upside of having idle cash is that it is highly liquid and can easily be converted into assets you can use to grow your company.
Need Help Improving Cash Flow? Gynger Has You Covered
At Gynger, we get it—cash flow is a huge part of keeping your business alive. That's why we offer an innovative solution to finance software investments without the hindrance of big up-front costs and yearly payment renewals. We offer an innovative solution that helps you finance your software investments without having to worry about large upfront costs or yearly payment renewals.
How much capital can you be approved for through Gynger? Use our convenient calculator to find out.