As an entrepreneur, you have a passion for developing product ideas and getting them to market. But starting a business is more than learning to develop your ideas and marketing them. A business must be profitable, and its finances must be organized.
One of the biggest shortcomings of most entrepreneurs is managing their cash flows. Sounds familiar? In that case you need to know the next three overriding principles of cash flow management:
1. Keeping up with what customers owe you and getting that money as quickly as possible.
2. Keeping up with what you owe others (landlords, suppliers, employees, etc.) and making sure that they are paid on time
3. Knowing when there are shortfalls and taking the steps to fix them as quickly as possible.
Staying on top of these three major aspects of cash flow management, rather than focusing only on sales and profits will do far more to keep your business healthy, especially in its early years. I asked some business leaders for additional best practices to manage that cash flow successfully, and here are their answers:
1. Figure out your breakeven point “This is the point at which your revenues will meet all of your expenses. You need to establish this figure, adjust as you get into your startup, and keep that figure in mind as your target. Once you achieve that, you can relax just a bit and start looking toward making a profit.” - Joshua Fletcher, CEO of CallTrackingPro.
2. Keep the focus on cash flow management “Your long-term business goal is not to break even. It’s to be profitable, so keep your focus on that cash flow. Why? Because things change. A supplier raises his prices; you have to add staff. And if your incoming cash flow cannot cover those expenses, then you have to make some changes.” - Zinhar Pinhasi, Founder and CEO of MonsterCloud.
3. Build a cash reserve “In the beginning, you may be living “hand to mouth,” and even using your personal cash reserves to keep your business afloat through the early months or even years. Once you begin to make a profit, set some aside on a regular basis (each month) until you have built up a 4-month reserve of expenses. This will take you through those shortfalls that are bound to come, as well as allow you to plan for some expansion down the road. Even after you achieve that 4-month reserve, continue to add to it. You will want to have the money to scale when you are ready.” - Mark Goodman, President of VidgoStreamingTV.
4. Use a good cash flow management tool “There are plenty of tools for small businesses, and many of them are free or very low cost for small business startups. Check out the template on the SCORE website. This is a non-profit organization that provides advice and tools for entrepreneurs. It’s a good resource for many things. This will allow you to watch and manage your cash flow on a daily basis.” - Hugh Odom, CEO, CellTowerLeaseExperts.
5. Don’t let debtors slide “When people owe you money, you should expect to be paid. If you are not persistent and constant about invoicing, providing due dates, establishing late fees, and dunning customers for payment, then find someone who is. That individual will be well worth the salary you pay them. As much as you are able, collect payments at the time of sale. Net 30-days is as long as you want to go, if collection is not immediate.” - Alex Oliynyk, CEO of GiftedShirts.
6. Give incentives if customers pay at point of sale or shortly thereafter “Give customers incentives to pay quickly – a discount for immediate payment. If you plan to have finance plans, set them up via contract and enforce them strictly. If you do not, you lose credibility and revenue. And pre-approve your customers for credit before you give it. Nothing is worse than having to pay credit collection agencies or going to court – often you receive only a percentage of what is owed, and court judgments mean you still have to find the money.” - Derek Iwasiuk, CEO of JuicyDomains.
7. Negotiate your payables to extend as long as possible “You want a reputation for paying your bills on time. But that does not mean that you cannot negotiate favorable terms. Try to get 60 or 90-day “same as cash” agreements, so that you can spread payments out at no interest.” - James Harbal, CEO of KeywordInspector.
8. Use proven marketing techniques to increase your sales “Offer discounts and special sales. Give discounts when customers refer others. Enter customers in a contest with every purchase. Offer a 7- or 30-day free trial. And the more satisfied customers you have, the more customers you will gain as referrals.” - Danny Ericsen, CEO of StarFireWebDesign.
9. Use the right accounting tools “There are a number of other accounting tools you can use, and they simplify everything. Most of them will generate invoices and second notices, etc., keep and organize the data you need for tax purposes, and let you see exactly where you are at all times. Ideally, you should find one that stores all of your data in the cloud so that you can access it from anywhere and on any device.” – Andriy Moraru, CEO of EarnForex.
You do not have to be a financial genius to manage cash flow. You do, however, have to be steady and regular in that management, so that you know exactly where you are at any given moment and what you may have to modify if shortfalls occur.