10 January 2019
There's a phrase in finance that couldn’t be truer: revenue is vanity, profit is sanity and cash is reality. There is so much focus on revenue in the startup world that sometimes we neglect the numbers that really matter. And it’s cash that matters much more than revenue and profit – it’s the lifeblood of any business. Things can dry up very, very quickly if you’re low in cash and aren’t properly managing it.
However, it's not always doom and gloom. Good management of cash can help you identify problems in advance so you can predict cash movement and be sure it's well managed.
Here are five top tips for managing your cash:
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Know your numbers
It's very difficult to manage cash flow if you don't know where your business currently stands. How much cash is in the bank? What gets paid tomorrow? When will we need more funding? These are all things you need to know in order to manage cash. Spend some time understanding your cash flow reports and get to know them inside out. Know where the cash has come from and where it's going.
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Plan for highs and lows
Startups can and do go through periods of peaks and troughs with their cash balance - salaries at the end of the month can put a strain on the cash balance, whereas seasonal sales during Christmas can boost it. If you know when you are likely to hit the red then you can get a plan in place in advance. Hold back payments to suppliers or chase up your customers when you're expecting to fall into the red, and resist the urge for unnecessary expenditure when you hit a high.
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Unit economics is key
Dropping your sales price might seem attractive if you're looking to generate growth, but selling your product for £8 when it costs you £8.50 to make will generate a net cash outflow of 50p on every unit you sell. You can balance this out by winning investment, but it's not sustainable. You'll need to put your price up or reduce your costs at some stage and that will probably come much quicker than you think.
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Utilise customers and suppliers
Customers and suppliers can be a valuable source of short term financing for any startup. Offering customers a small discount for early payment, collecting payment via direct debit or even requesting cash up front from new customers means you can get the cash in quicker. If your suppliers are offering 30 day credit terms then don't pay them after 15 days, make full use of the 30 days! Good cash management is all about getting the cash in quicker and paying out slower.
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Don’t forget to manage your unused cash
It's tempting to just sit there and admire the size of the number showing on your statement once you’ve finally closed a funding round. But if cash is sitting there unused, it's losing its value. Get your cash burn scheduled out and work out exactly how much you need in the next few months. Move the remainder to an interest bearing account (check you can do this first) to make the cash work for you. It might not be much with the current interest rates, but it's better than nothing!
Ultimately, you can't always control when or how your cash comes in and goes out, but knowing your numbers and being able to manage your business around the cash flow gives you a much better chance of success.
For further details, or if you are interested in discussing your business’s cash flow, please contact your usual UHY adviser or fill out our contact form.
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