Starting a business is exciting, but it can be easy to overextend yourself. As you begin taking on new clients and getting positive feedback, it is tempting to start expanding your operations – but not so quick. Even taking on new clients costs money. You have to have the “cash flow” to support that business. Whether you provide services or sell products, you have to have the money to cover your overhead and any supplies until those new clients pay – and people don’t always pay on time. Here is what you need to know with our start up business guide to cash flow management.
Proper cash flow management can make sure that your start-up is never caught in the red. “The lag between the time you have to pay your suppliers and employees and the time you collect from your customers is the problem, and the solution is cash flow management,” explains Entrepreneur. “At its simplest, cash flow management means delaying outlays of cash as long as possible while encouraging anyone who owes you money to pay it as rapidly as possible.” However, that’s really only part of it.
In order to be able to use cash flow management to your advantage, you need to know when you will receive payments – and those predictions need to more informed by more than merely looking at the due date on your invoices. You will need to look at each customer’s payment history and evaluate how likely each one is to pay on time. In addition, you will also need to have a good handle on your company’s expenses. One unexpected bill or an underestimated cost of goods sold could throw your company’s finances into a tailspin. Obviously, it can be difficult to estimate these expenses when your business is new or you have just started working with a particular client or supplier. That’s why you need to be conservative in the beginning, if not in general.
Secondly, remember that accurate books matter. Maintaining your company’s accounting is really no different than managing your personal checkbook. You have bills you know are coming and you have the income you expect to receive before those bills are due. You can delay your payments up to the due date to extend your finances a little, but deep down, you know your bank account balance is really just a matter of timing. All of this works because you keep an accurate checkbook register. Essentially, you need to make sure you are doing the same thing for your business.
Start by looking at the cash you currently have on hand and the expenses you know are coming out. Look at the amount in your employees’ paychecks as well as the taxes you need to pay on those wages. Add in the cost of goods sold and your overhead expenses. Also, include any debt payments you need to make. You’ll get a good idea of where your company really stands financially and just how much it will hurt if you are unable to collect on your current outstanding invoices
Maintaining a Cash Reserve
Maintaining cash flow for your business is also like keeping a personal checking account in another way – the need for a cash reserve. To avoid overdrawing your personal checking account, you probably keep some type of cushion so that you aren’t taking your balance down too low. Whether it is a couple of hundred dollars or a few months’ worth of expenses, that cushion exists so that you have a backup in case you are inaccurate in your math, you have some type of unexpected expense or you don’t receive a payment when you think you will. Ideally, you want to do the same for your start up.
From the very beginning, keep some cash in reserve to cover your company’s finances. If you have the opportunity to take on a new client and need to cover the initial cost of those goods or the overhead in providing those services, secure financing to cover those extra expenses. This way, you won’t risk your company’s cash flow on whether or not a new client pays on time.
Invoicing and Receivables
As a new start up, you should also pay attention to the way you manage your receivables. It starts with invoicing. “Once you’ve delivered a product or service, don’t wait to invoice,” says Xero. “Consider sending invoices immediately, or on a daily basis, depending on the nature of your work. If you are providing a service, think about asking for a deposit upfront, or a payment part-way through. It’s a reasonable request.” In general, the sooner you invoice, the sooner you will get paid.
In addition to asking for down payments or milestone installments, you might also want to consider ways to improve the structure of your receivables. Offering discounts to clients who pay before the due date is one way – or conversely attaching a fee for payments received after that date – but it is not the only way to ramp up your receivables. In addition to payment penalties, you might want to consider requiring credit checks on new customers, setting up automatic debit payments, holding the contract amount in escrow or simply following up on your accounts receivables regularly.
Formalize Your System
Whatever strategy you decide to use to manage your start up business cash flow, spend time formalizing your system. For instance, map out when you will balance your company checkbook and when you will follow up late paying clients. This way, you can see how much your start-up has available in cash at any given time and that you are aware of any future shortcomings before they become problems.
With IntegraPay, you can use cutting edge payment technology that can help speed up your cash flow. Inquire about our pay up now technology to reduce debtor days. Use Xero? IntegraPay + Xero integration helps you get paid every time you send out an invoice. With more convenient ways for your customers to pay, such as direct debit, credit card or BPAY helps keep the life of your business flowing. Are you concerned about your businesses cash flow? Contact us at IntegraPay to discuss how we can help you get paid faster.