HomeStartup Insights8 Effective Strategies for Managing Cash Flow in Early-Stage Startups

8 Effective Strategies for Managing Cash Flow in Early-Stage Startups

8 Effective Strategies for Managing Cash Flow in Early-Stage Startups

To help startups navigate the tricky waters of cash flow management, we’ve gathered eight insightful strategies from CEOs, Founders, and other business leaders. From considering prepaid annual contracts to diversifying revenue and fast-tracking payments, these tips offer a comprehensive guide to ensuring your business has enough cash on hand to operate smoothly.

  • Consider Prepaid Annual Contracts
  • Minimize Overhead Costs
  • Automate Cash-Flow Forecasting
  • Secure Early Funding
  • Establish a Cash-Reserves Fund
  • Maintain and Adjust the Budget
  • Collect Owed Money Quickly
  • Diversify Revenue and Fast-Track Payments

Consider Prepaid Annual Contracts

Unless you are swimming in venture-capital funding, start-up leaders must keep a close eye on cash flow.

For cash-flow-conscious start-ups, I strongly recommend considering prepaid annual contracts, which generate a full year’s worth of payments immediately upon signing. Although this is the norm for enterprise players, SMB-focused start-ups shy away from this.

In our experience, smaller businesses are happy to pay for a year upfront, provided there is a probationary period where they can back out after a few weeks. This alleviates the risk for the organization, giving them the confidence to commit to a whole year.

More adventurous organizations could even consider prepaid multi-year contracts, providing a sizable amount of revenue immediately. Although these typically require sizable discounts, for bootstrapped organizations, the cash flow advantage more than justifies the discount and is well worth trying.

Oliver Savill, CEO and Founder, AssessmentDay

Minimize Overhead Costs

In the early stages of a startup, one strategy for managing cash flow is to keep overhead costs low. This can be achieved by operating with minimal staff or delaying certain non-essential investments. 

As another example, selling products on consignment or bartering services can help reduce expenses and enable access to resources that otherwise wouldn’t have been available. It’s important to ensure that sufficient capital is readily available in order to keep the business running smoothly while avoiding any sudden shifts in operations; proper budgeting and forecasting are essential here as well.

Julia Kelly, Managing Partner, Rigits

Automate Cash-Flow Forecasting

Automating cash-flow forecasting is a crucial strategy for managing cash flow, particularly in the early stages of a startup. At this stage, businesses are often juggling multiple financial obligations while trying to establish a steady income stream. 

An automated cash-flow forecasting tool can help manage this delicate balance by forecasting projected inflows and outflows. This paints a clear picture of when and where cash will enter and leave the business, allowing you to anticipate future cash needs and avoid potential shortfalls.

By utilizing a cash-flow forecasting software solution, startups can ensure they have sufficient cash on hand to meet operational needs, invest in growth opportunities, and cover unexpected expenses. This not only helps to maintain smooth business operations, but also builds financial resilience, setting the foundation for long-term success.

Katie White, Content Marketing Manager, Centime

Secure Early Funding

One key strategy for managing cash flow in a startup is to get funding even before you need it. This means you should start looking for funding sources early, even before cash gets tight. This could be a bank loan, an investor, or a line of credit. 

Establishing these relationships early on gives you a safety net. If your cash flow dips or you have an unexpected expense, you’ll already have potential financing lined up. This helps ensure your business has enough cash to operate smoothly. Think of it like a parachute; you’d rather have it and not need it, than need it and not have it. 

So, start securing your financial safety net as soon as possible. It’s a smart move for your startup’s cash flow.

Irina Poddubnaia, CEO, Founder, TrackMage

Establish a Cash-Reserves Fund

One of the most important strategies for managing cash flow in the early stages of a startup is to establish and maintain a cash-reserves fund. This fund should be large enough to cover at least three months’ worth of expenses, allowing your business to remain operational even in times of reduced income or unexpected costs. 

You can begin building this fund by setting aside a portion of your business’ profits each month and avoiding the temptation to spend these funds on unnecessary items.

Keith Sant, Founder and CEO, Sell My House Company

Maintain and Adjust the Budget

Cash flow control is a concern whether you utilize a business line of credit, get a secured business loan, or try self-financing to get your funding. Undoubtedly, you need to invest a lot of your available funds into various aspects of production, marketing, etc. Then, after receiving any profit, you must reinvest it into the operations again. Indeed, cash depletes fast, especially during the early stages of a startup, and budgeting should help there. 

Maintain a record of all expenses and income of your business to estimate how much you can afford to save per month. You should check your financial statements and documents to find your primary pain points/priority purchases. Then, remove what you see as draining cash too much and allocate funding for critical costs only. This way, you can save more money for your business and avoid going into the red. Also, you should consistently maintain the budget according to your changing needs.

Lyle Solomon, Principal Attorney, Oak View Law Group

Collect Owed Money Quickly

Getting the money that the startup is owed back as soon as possible is one cash flow management best practice. Being too eager to please, finance-wise, can have disastrous consequences. Looking a little stingy and uptight with cash is much better than shrugging off late payments and closing your doors before you even had a chance to shine. 

Mark any invoices from vendors or outside parties as “due immediately.” Always have someone monitoring receivables, and move towards automated charging as soon as possible to keep that money flowing.

Raja Subramanian, GM, Power Wizard

Diversify Revenue and Fast-Track Payments

Relying only on one revenue source might be dangerous, especially in the early stages. Think of ways to increase your revenue, such as launching new products or services, forming strategic partnerships, or a combination of these. 

The effects of variations in a single sector of your organization might be lessened by diversifying into related fields. Maintaining a positive cash flow requires fast invoicing and payment collection. Set clear payment terms with your clients and consumers, and discuss them upfront. Implement automated invoicing systems and payment reminders to lessen the likelihood of late payments. If you want to encourage fast payment from your customers, you might reward them with a discount if they pay their bills early.

Tiffany Hafler, Marketing Manager, FORTIS Medical Billing

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