An ability to maintain a healthy cashflow within your startup could very well mean the difference between failure and success for your business. Many businesses falter at the first hurdle simply because their cashflow is not well managed – don’t succumb to a poor cashflow, stay on top and keep tabs on your cashflow like it’s your own cash. As if worrying about starting a business in faltering economic conditions wasn’t enough, having to keep an eye on cashflow at the same time might be enough to put a lot of people off from forming a startup – don’t let one of those people be you!
It’s fair to say that most of us have a pretty good idea just how much cash we have in the bank at any one time – we know this because we have to pay our bills and other liabilities, so we keep a pretty close eye on our personal finances in an effort to determine what we can and can’t afford.
Lots of people take their eye off the ball when it comes to business, they lull themselves into a false sense of security, and they somehow convince themselves their relative small pot of startup cash will stretch a long, long way. The reality is, starting up a business is costly, much more costly than you think.
When starting a business, it’s not just your first batch of stock you need to take into account, it’s rent on premises (unless you’re starting a home-based business, utility bills, tax liability, and so on. What seems like a pretty simple task; maintaining a good cashflow, can soon descend into an all out nightmare.
There are a few steps you can take to optimize the cashflow within your startup:
- Adopt the JIT (just in time) stocking system – JIT is great, because you only ever order new stock when you’re just about to run out. When dealing with domestic suppliers this system works great, but bear in mind when working with suppliers overseas it can be a little harder. Customs delays are frequent with imported goods – don’t leave your ordering too late with JIT, because you can easily find yourself with lots of orders to fulfill, and no stock to fulfill them with.
- Pay suppliers monthly where possible – paying suppliers monthly can be a good way to maintain a healthy cashflow. It means you may have already sold the goods on before actually having to pay for them – leaving you in a very strong position. Paying suppliers monthly is also handy for things like stationary, logistics etc, and not just stock!
- Invest in new lines and products wisely – expanding your inventory may be your number one priority, but do it wisely. Make sure you draw up a list of potential new products then scrutinize each one carefully, when running a startup it’s always a clever idea to go for the products that will bring you the best profit margin. You can always bring products with lower margins onboard later on, remember the key to a successful startup is survival – you’ll definitely need to be making money if you’re to survive in the long run.
- Increase the benefits of economies of scale – it’s a tradeoff between benefiting from economies of scale and diversification. Hoarding an inventory of 50+ products and only stocking a couple of each may seem like a smart idea, but it has many pitfalls and drawbacks. Buying just one or two products in much greater quantities will give you much better focus and increased economies of scale (bulk buying discount). Remember though that lots of products are seasonal and demand varies, buy hundreds of a seasonal product and even a small dip in demand could ruin your cashflow and your business, so buy sensibly.
- Manage assets sensibly – we all want a sporty new soft top car and a top of the range laptop when we start a business so we can show off to friends, family and clients – don’t let your enthusiasm for the finer things in life destroy your cashflow. Take it easy and only burden your startup with bills you know it can bear. A new cell phone strictly for work use and maybe some coffee mugs with your logo on will show people you mean business just as much as a new sports car. Once your startup is established and thriving, then you can think about investing in a fleet of flashy cars and a corporate box at your local baseball team’s stadium.
- Don’t let your business grow too fast – believe it or not, growth can sometimes lead to the downfall of a business. Businesses that collect payment on a monthly basis or after a customer or client has already received the product or service are those most at risk of finding their demise as a result of growth. Watch your business grow steadily and carefully, if you’re getting lots of new business you just can’t cater for, take early evasive action like price increases to cool the demand, and potentially save your startup.
Above just a few of the big factors to think about when it comes to maintaining a healthy cashflow are considered. Keep close tabs on your startup’s finances and do your best to keep them in the green. If you spot a problem ahead, do your best to avoid it. While your business is in the startup phase many challenges will await you, but once you’ve weathered those storms and proved your business can survive, you can watch it go on to prosper, then and only then can you think about grabbing that soft top company car you’ve been eyeing up.