Cash Management For Startup Businesses (5 Video Links)
A majority of new businesses fail.
Why?
Lots of reasons. Maybe the product or service isn’t attractive enough to motivate people to buy. Businesses also fail because owners don’t manage growth well.
However, the biggest reason for a business failure may be financial- and you can take steps to avoid the problem. Here are some of the best cash management strategies for small business.
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Contents
How Do You Start?
No business can succeed without a detailed business plan, and you need a plan to know how much cash is needed to operate. If you don’t have a written business plan, create one.
Assume that you design a more durable rain jacket for hikers and mountain bikers. The total production costs are $50 per jacket, and market research tells you that serious outdoor hikers and bikers are willing to pay $85 per jacket.
Fortunately, you can find great software to help you with this process. Using software can help you address every important factor in your business, including market research, competitor analysis and pricing.
You’ve gathered research by giving dozens of jackets to consumers, and getting their feedback. They tell you that the jacket is more rain-proof, and it solves the problem of being stuck on a trail soaked during a hard rain. Based on the total market for rain jackets and how you can differentiate your product, you estimate sales of 150,000 jackets in year one.
Business plan software can help you plan your estimated sales, the costs you’ll incur to generate sales, and the cash inflows you’ll need to operate. When you input all of these assumptions, the software will create a set of financial statements for you.
Start by creating a business plan.
Finding Cash
Once you have an estimate of how much cash you need, you can think about where the cash will come from. This is the first step to managing cash flow effectively.
To produce 150,000 jackets for year one sales, you need (150,000 units X $50 cost), or $7,500,000. Cash flow management for small business requires owners to estimate monthly cash inflows and outflows.
Product or service sales will generate a large portion of your cash inflows, but those cash receipts may not be enough to operate your business in the short term (over the next 30 to 60 days). If you’re waiting on customer payments and need more cash, you have a few small business cash flow options.
The first option is to open a line of credit (LOC) for your company. You can do this by contacting your bank, or a financial lender. Even if you’re a startup firm, a bank may offer you an LOC if you’re willing to provide collateral.
Having an LOC means that you will never be in a position where you have no money to fall back on. The LOC should only be used as a last resort, and you should pay off the balance quickly, to avoid interest charges on the loan.
What About Credit Cards?
When you speak to your bank, ask about credit card options for small businesses. To cash flow business operations, some owners consider credit cards.
The best business credit card can provide incentives, such as cash back on purchases, or hotel and air travel points that you can use to cover business travel costs.
Avoid Mistakes
Be careful: Your priority should be to manage your business with cash inflows, and then to use an LOC only when cash flows run short for a month or two. If you use a credit card for business, you must pay off the entire balance each month, in order to avoid interest charges and fees.
Don’t carry a credit card balance from one month to the next.
Take these steps to avoid getting submerged in debt as many new businesses often do. Small business cash flow management requires a weekly (sometimes daily) focus.
Diversify Your Business Portfolio
Last but not least, if you are looking to make sure that your business is financially healthy in the long term, you do need to think about setting up different sources of income, reaching beyond the typical revenue line.
Once managing cash flow for rain jacket business becomes more predictable, you might add other products- maybe bike tire tubes for mountain bikes. Cash flow management strategies for small business can get easier, if you sell multiple products and services.
One example of this would be sponsored content on your website. Other businesses who are not competitors may be more than happy to pay for representation on your site with ads and high-quality content that can even improve your SEO.
This post is for educational purposes only- best of luck!
Ken Boyd
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
(email) ken@stltest.net
(website and blog) https://www.accountingaccidentally.com/
(you tube channel) kenboydstl