Whether you’re a new entrepreneur or an experienced business owner, you’ve probably heard the cliché: “Cash is king.” While that may seem like a trite phrase, it’s true. Cash flow is critical for any business startup and can make or break your company in many ways.
From managing cash flow to getting the best value for your money on supplies and services, here are some steps you can take to manage your financial resources effectively from startup through growth:
Be sure to have enough working capital
Working capital refers to a business’s money to meet its short-term liabilities. Your short-term or current assets include inventory and accounts receivables, while your short-term liabilities include accounts payable and taxes payable.
For example, suppose you need $30,000 worth of barnwood beam that is rustic to decorate your office but have only $25,000 in the bank (your current assets), and you owe suppliers $20,000 (your current liabilities).
In that case, your working capital is negative by $5,000 because you don’t have enough money to pay your bills. When starting as an entrepreneur, there are two essential factors to consider when deciding how much working capital is needed:
- You’ll need the inventory and operating expenses to keep the lights on.
- The amount of money needed for a startup.
If you’re starting a new business, you’ll likely need cash on hand to meet payroll or pay other bills until your business generates enough revenue to cover those costs.
The amount of working capital needed will vary from business to business, but generally speaking, it’s essential to have enough money available for at least 3 to 6 months of operating expenses.
Make sure the numbers of your business plan make sense
Your startup’s success depends on several factors: your product, your market and its size, and the competition. But you can do one thing to improve the odds of success regardless of these considerations: make sure the numbers in your business plan make sense.
The first step is to understand what it costs you to run your business and how much revenue you will need to break even. You need enough working capital for those early months when sales are low (and will likely stay that way).
If you don’t have enough money left over after paying all monthly expenses, then something is wrong with either your projections or how they were calculated—or both!
Once you know where all money comes from and where it goes out (including taxes), consider what happens if things go wrong and sales suddenly drop off by 50 percent or more.
Make sure there’s enough cash left over so that no one has any doubts about whether they’ll get paid next month and every other month after that through some sort of financial cushioning built into the budget process.
Otherwise, everyone will panic when unexpected events occur, which could lead them back into their old ways because they don’t feel secure anymore—and neither should anyone else who works at this company!
Have an exit strategy from the beginning
Having an exit strategy from the beginning is critical. A good exit strategy provides you with a pipeline of potential offers. It allows you to grow your business rather than being forced to sell because of financial stress or external circumstances.
It’s important to consider your options and be prepared for a variety of scenarios, such as selling your business:
- To an investor or another company that sees its potential and wants to scale it up;
- To an employee who has worked hard for years with no real opportunity for compensation outside of working full-time;
- To someone else who may have a related product/service offering but no understanding of what makes yours so special;
- Or simply leaving it behind when the time comes by having enough equity in the company that allows you to walk away knowing you’ve been able to live comfortably on what remains after selling off assets (such as real estate).
When it comes to exit strategies, you want to consider all the options available to you. If your business is already profitable and growing, then selling early may make sense because you can realize a quick return on investment.
But if your business is still in its infancy or struggling financially, then an investor may be able to help turn things around more quickly than trying to do it yourself.
Use bootstrapping strategies to save money and limit debt
Bootstrapping is a method of starting a business without taking on any debt. It’s a great way to reduce risk and keep costs to a minimum, but it can also be difficult if you’re not prepared for it. Many startups have used this technique in the past and now, they are generating hundreds of thousands to millions of net profits yearly.
Here are some tips for bootstrapping your startup:
- Use your own money
- Get friends and family members to invest
Bootstrapping may seem easy to start your new business, but it’s not always the right choice. If you don’t have enough capital saved up (or if there aren’t people willing to invest in your idea), bootstrapping might not work out!
Consider these factors before deciding whether this option is right for you:
- Do you have enough money saved up? If not, then bootstrapping is probably not the right choice for you. You’ll need to find some way to raise funds before starting your business, whether that’s through investors or by taking out a loan.
- Can your startup be profitable without outside funding? If so, then you don’t need to worry about bootstrapping; it won’t apply in this case!
- Is there a market for your product or service? If so, you can probably find investors willing to fund your startup; if not, you’ll need to rethink your idea or figure out how to make it profitable with limited funds.
Track your financials throughout the startup process
One of the most important things you can do is track your financials throughout the startup process. It’s easy to get lost in the weeds of operations and not have an open line of sight into what is working, where the problems are, and how to scale.
A good way to start tracking your financials is by creating a simple spreadsheet or keeping track with pen and paper. Keep track of every expense as they happen so that at any time, you can go back through it and see what worked well, what didn’t work well, and how much money was spent on each thing.
This will help inform future decisions about pricing models, marketing campaigns, product offerings—anything that costs money for you to generate revenue (and hopefully profit).
Starting a business can be an exciting time, but it can also be stressful. There are many factors to consider when you first start out, and being prepared for them is key to ensuring your business is successful from day one.
The tips above should help you navigate those early months and years of running a company confidently and easily — good luck!