5 Common Cash Flow Problems to Avoid in Your Startup
Jack Welch said, “If I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction and cash flow.”
As suggested by Jack himself and evident from multiple researches, poor cash flow is one of the reasons why one out of four businesses fail.
It is really sad to realize that most young businessmen are not aware of proper definition of what actually cash flow is. According to how accountants define it, cash flow is the difference in amount of cash available at the beginning of the period available and at the end of period. It’s negative if closing balance is not higher than opening balance, else it would be positive. The statement of cash flow is pillar of your company. Cash inflow states money used by company and cash outflow states where company spends money, and this helps you with effective financial planning.
Cash flow is unlike net income, it is amount of money left in your company’s account after repaying debt and lease obligations, unlike net-income which eliminates non cash item.
Maintaining cash flow when you launch a startup
Launching a startup comes with many troubles and hurdles, and managing your company’s cash flow efficiently is the top of all. If you succeed in maintaining your cash flow stable for a year or more, chances are that your business will continue to grow.
There can definitely be external factors that will negatively affect the cash flow of your startup but dealing with them effectively and tackling the internal factors as well is what is required. In this era of technology, you must use accounting and financial apps and softwares such as an invoice maker that takes care of all your accounting needs.
Here we are listing five common cash flow problems that you may encounter but need to avoid more than anything else. Have a look at these and improve your financial management.
- Bad Debts
Bad debts are amount that cannot be recovered. One must be careful of proper credit control system to avoid bad debts. They can be very harmful for your business. If your company is good at bookkeeping record then proper credit control system can be very straight forward.
- Books aren’t organized
Unorganized book keeping is fatal for your startup. Some people don’t understand how important book keeping is until times of trouble knock the door. Don’t ever put books aside and always try to put on top of your priority list and do maintain your accounting system and keep it up to date. If your startup is based on a physical store model, you must get a pos software to take care of all your point of sale needs.
- Profit Issues
What does lack of profit do? It results in lack of cash flow. Even if you exist with cash reserves from previous profit, you can run without profit for a while. But not consistently losses is bearable, soon it will catch you, regardless how small or large your cash reserves are. Try some business accounting software to avoid profit issues.
- Growing business fast
If you are new to business and your startup is a new venture in market, try to slow down your pace. Growing your business too fast can hurt cash flow and chances are you may have no money on pay day.
For example, you’re selling laptops and other electronic gadgets. You landed a big client who wanted a large project completing in 12 months and you immediately took on the extra staff members you needed, however on pay day you could not cover their wages.
To fix this problem, bank can lend you line of credit but you have to pay interest for time you actually lend the cash. Also ease up some issues by using accounting online system.
- Essentiality of cash flow forecasting
Cash flow forecasting is something your accountant can create for you. It tells you which month you’ll face a cash defect and which month you’ll be surprised by a cash surplus. It opens a lot of insight about your business by comparing actual figure. You’ll get pretty much idea about requirement of cash your business needed.
Do pay attention to avoid such issues. New startups mostly face above two or three problems. You have to develop solutions to these in order to keep cash flowing into the business and maintain a good financial planning.