No matter if you are starting a new business or operating a successful brand, managing cash flow is essential. It is like the fuel that keeps your business working under any market situation.
Let’s talk about why managing cash flow is essential in businesses. Have you ever tried buying the latest gadget for your cafe and found your business account is empty, even when you are making good revenue? That’s because you didn’t focus on business cash flow and took necessary actions on time. But, if you purchased cash flow management accountants UK, you will mostly never have insufficient funds or at least will know in advance, when the business will runout of cash .
This guide will cover essential tips on handling cash flow for startups.
Table of contents
What is cash flow in startups?
As the name suggests, cash flow refers to the cash inflow and out flow in your startup. It can either be positive or negative.
To calculate the cash flow in your business, subtract all your payments and outgoings from your total receipts and incomings. This is different from profit and loss account, as it includes credit sales and purchases, non-cash items like depreciation, amortisation etc.
If the outcome is positive, you have more cash at the closing date than on the opening date; otherwise, you lack money to run your business.
Every business must have its cash-flow statements prepared regularly to keep track of the money in and out of the company.
Tips for managing cash flow in startups
Inadequate cash flow in businesses is the primary reason for their failure in the early stages. Startups have huge expenses during the initial trading stage, so having sufficient cash flow in business is essential.
Here are a few tips for startups to manage their cash flow.
1. Prepare a cash flow statement
Identify all income sources, revenue, and expenses in business. You can have more than one income source. Make a note of them and record how much cash they generate. Similarly, there are different types of expenses fixed, variable and one-time.
Keeping them in place helps you understand the cash flow. Besides owners, your investors and stakeholders also need to visualize the cash flow.
It is recommended that you have at least 12 months of cashflow planned.
2. Keep your business and personal funds separate
Paying your business expenses from private funds will provide uncertain business performance and errors in tax return filing. Further, you cannot easily calculate the cash flow when these two finances are mixed up.
Therefore, opening a business bank account and making all your company-related expenses from that account is advisable.
3. Issue invoices quickly and encourage fast payments
You must not be too generous with your credit terms. Issue invoices immediately after a sale, make easy payment options for clients and facilitate fast payments. Maintain an efficient cash cycle.
If your customers are not paying on time, try using a polite invoicing strategy, but never step back to take formal actions when needed. Keep looking attention to your accounts receivable turnover regularly. If they are piling up, it’s time to chase payments immediately.
An alternate will be using invoice factoring services.
4. Use accounting software
In the tech era, you cannot stand behind and encourage manual accounting processes in the startup. Owners doing their accounting must look for HMRC-compliant accounting software to fulfil day-to-day requirements and manage cash flow. However, if you hire a professional or outsource, the experts will take care of the software.
5. Set cash flow forecasts
If startups have regular, accurate cash flow projections, they can identify potential problems beforehand. It helps companies to make sound decisions depending on good forecasting and estimations.
You can start making a list of assumptions depending on your forecast, like, how a price rise for your raw materials can change the selling price, etc.
6. Use tax reliefs to save money
Self-employed people must prepare their tax returns, but most of them pay more than what they should pay. These are the tax-free allowances they are missing out on, and a professional will always look for them to reduce your tax bills legally.
For example, HMRC offers a personal allowance of £12,750 for everyone. Any income up to the limit is tax-free. There are several other tax deductions and reliefs that startups must know, like employment allowance, business rates relief, R&D tax credit, dividend allowance, etc.
7. Build up an emergency cash reserve
Every business, especially startups, must create an emergency cash reserve to meet their immediate needs without sufficient cash in the bank. It protects you from spending your personal savings or asking for debt.
For example, you need the latest equipment to fulfil the increasing demands of your client, but you don’t have sufficient cash in the bank. It is when your emergency cash reserve will take part in the business. Therefore, it saves you from being unable to fulfil the changing market demands.
8. Prepare a budget
Startups must have a budget prepared based on their income and expenses and stick to it. Look into your financial statements, and see if there is any unnecessary expense, especially variable expenses, that you can reduce to save money.
Budgets are not static documents and keep changing with a change in the market scenario.
9. Check financial health regularly
You must conduct a regular financial health checkup to understand the cash flowing in business. Look at your latest profit and loss statements and understand how good your cash flow management was in the previous month or quarter and what and where it needs improvement.
Poor cash management is a reason for business failure when you cannot pay liabilities and achieve your goals.
You must change your business strategy or budget plans if your business is not profitable.
Startups already have tight cash and resources to run their business, which urges proper cash flow management. If you couldn’t manage it during the last few months, hire a professional before it’s too late and you have to shut down.
Accountants have experience working with different startups and help you with intelligent solutions to deal with cash-flow issues. However, to save money, you can outsource cash flow management to third-party companies and claim a part of their payments on your tax return. Startups must take innovative steps to save their business from the first day.