April 15, 2024
Cash flow

Navigating the Rapids: Short-Term Cash Flow Management Tips for Startups

Martha Jary

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Launching a startup is an exhilarating journey, but it comes with its fair share of challenges - especially when it comes to managing cash flow. With 38% of UK startups failing because they run out of cash, survival in the early stages depends on effective short-term cash flow management. 

At Scaleup Finance, we have come up with some practical tips to help startups navigate the turbulent waters of cash flow, helping them to secure the liquidity needed to keep the business afloat.

Create a Detailed Cash Flow Forecast

The first step in effective cash flow management is to have a clear understanding of your financial landscape. Create a detailed cash flow forecast that outlines your expected income and expenses for the upcoming weeks or months. This proactive approach allows you to anticipate potential cash shortages and plan accordingly.

When putting together a cash flow forecast, the general guideline is to look at the next 13 weeks so that you have a full quarter in your workings and capture any quarterly cash flow items. You should start with your actual cash balance and take account of invoiced receivables, sales pipeline, fixed costs, payroll and any other variable costs. 

Access our complimentary short-term cash flow management template tailored for founders, available for download here!

Ideally, you should carve out some time on a weekly basis to review your actual cash flow over the previous week and compare it to your forecast. This will allow you to make regular updates to your plan and identify opportunities for cash flow optimisation. 

Negotiate Favorable Payment Terms

Negotiating favorable payment terms with suppliers and vendors can significantly impact your short-term cash flow. Explore the possibility of extended payment terms or discounts for early payments. In some cases, suppliers, including HMRC, may allow you to set up a payment plan to get you through a cash flow squeeze. 

Building strong relationships with your business partners and communicating openly about your financial situation can lead to mutually beneficial arrangements.

Invoice Promptly and Follow Up on Payments

Ensure that you invoice your clients promptly upon the completion of services or delivery of products. Implement a system for regular follow-ups on outstanding payments, most ERP systems, such as Xero, have automated dunning modules that can be activated. Timely invoicing and persistent follow-ups can help reduce the occurrence of late payments, therefore improving your cash flow.

Undertake a Subscriptions Audit

Embarking on a subscriptions audit is like spring cleaning for your startup's wallet. By giving your monthly memberships a second look, you might discover a few dusty relics that can be retired - helping you to save cash without sacrificing productivity.

Monitor and Control Operating Expenses

Keep a close eye on your operating expenses and identify areas where costs can be reduced without compromising the quality of your products or services. This might involve renegotiating contracts, finding more cost-effective suppliers, or implementing internal cost-cutting measures. Prudent expense management is crucial for maintaining positive cash flow.

Seek Out Quick Revenue Diversification Wins

Diversifying revenue streams with a focus on low-hanging fruit and easy wins is a savvy strategy to extend the short-term cash runway for your business. 

Identify supplementary products or services that align with your existing offerings, leveraging your current customer base and operational capabilities. Look for opportunities where minimal investment can yield quick returns, providing an immediate boost to cash flow. Whether it's introducing add-on services, creating limited-time promotions, or tapping into untapped market segments, these incremental additions to your revenue portfolio can make a significant impact. 

Explore Short-Term Financing Options

In times of cash flow strain, consider short-term financing options to bridge the gap. This could involve negotiating a line of credit with a financial institution, exploring invoice financing, or seeking short-term loans. However, it's essential to carefully assess the terms and interest rates to ensure that these options are viable for your startup.

You can find out more about the alternative financing options available to your business in our previous blog post on the topic.

Stay Agile and Adaptive

Be prepared to adjust strategies based on changing market conditions, proactivity is the linchpin of this approach – staying ahead of the curve in identifying and addressing potential cash flow challenges before they escalate

The Bottom Line

Effectively managing short-term cash flow is a critical skill for startups aiming not only to survive but to thrive in the business world. By implementing these tips and maintaining a proactive approach to financial management, your startup can weather the initial challenges and lay a solid foundation for long-term success. Remember, navigating the rapids of cash flow requires a combination of foresight, discipline, and adaptability. 

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