Are you looking into how to prevent cash flow problems?
Cash flow problems are probably the number one killer of businesses big and small. Not even the largest mature corporations can escape the math.
Early-stage startups and small businesses can be even more susceptible and at risk of failure with even minor changes and stalling of incoming and discretionary funds.
Risks Of Running Into Cash Flow Problems
Bankruptcy is the biggest and most obvious concern and the result of cash flow problems. That doesn’t necessarily have to be the end of a company, but it isn’t the most desirable outcome.
As the founder or CEO, your business baby may live on, but there is a good chance you won’t be a part of it much anymore in this scenario.
There are many other side effects too. The staff is a big one. Cash flow shortages usually show up in not being able to pay the bills or make payroll first. You might be able to punt some bills down the road for a couple of weeks or months, but your employees aren’t going to wait long without being paid.
At best they can be demoralized and tune out of the mission. Some will leave and will leave their experience online for others to read in reviews. If your best team members go to work for your competition, you are going to be at a worse disadvantage.
Keep in mind when wondering how to prevent cash flow problems that, eventually, suppliers and vendors will get tired of late payments too. The best may cut you off and supply your competition instead, leaving you to work with second and third rate options.
Startup fundraising can be impacted too. You can imagine that as an investor it is a lot more attractive to fund profitable businesses. Coming in with rescue funding for a company that is losing money and on the brink of disaster is high risk. If they do invest the terms certainly won’t be as appealing as if you were in a strong financial position.
Then there are the lost opportunities. Without extra cash, you can’t seize on new opportunities to grow. This can create a dangerous downward spiral.
This is all beyond the stress which can steal your passion for your business and impair decision making.
So, how do you prevent cash flow problems?
Raise Equity Instead Of Going Into Debt
Business loans, lines of credit, credit cards, and taking terms on invoices are common ways to fund businesses and startups. It can work spectacularly. Though it does come with extra risk and something to look into when figuring how to prevent cash flow problems.
Debt means repayments and interest. Typically, no matter whether you are making money or not, you are expected to make regular repayments. Fall behind and the penalties, fees, and occurring interest just makes it harder to catch up.
Consider raising startup capital through equity fundraising instead. You give a piece of your company in exchange for the money you need. If the business is performing well and cash flow is plentiful, everyone gains more. If cash flow is interrupted, at least you don’t have to deal with collectors and defaulting debt as well.
Keep in mind that in fundraising storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
Raise Capital In Advance Of Your Needs
If you are asking yourself how to prevent cash flow problems., don’t wait until the last minute to raise capital. The closer you are down to the wire, and the less financial runway you have, the worse the negotiating position you are in. The reverse is also true.
The stronger you are financially and the more free cash flow you have, the easier the round will be to raise, and the better the terms.
Even before your fundraising campaign goes live you need to be building relationships with investors. So, get started.
Furthermore, in the video below I cover in detail how to build relationships with investors which you may find interesting.
Raise More Than You Think You Need
When you do raise money, raise more than you think you need. Everything notoriously costs more than you expect and takes longer than you plan. Don’t come up short.
In fact, experienced investors will tell you to raise and accept investment when you don’t need it.
You can imagine how relieved all the founders are who raised money just before COVID, versus those looking back and wishing they had done so a lot sooner.
Begin By Building Revenue
It may not seem very trendy to launch a startup focusing on income and profits anymore, but it makes a lot of sense.
If you begin with revenue you have cash flow. If that falters you can still raise money, but you have a working business model.
Have A Reserve Fund
Even in the best business cash flow can be interrupted or face temporary blips. The best way to avoid any negative impact from this is to have a healthy reserve fund. This will help you comfortably weather these periods until you can get back on track.
As with personal finances having at least 3 to 6 months of expenses in the bank in reserve can be a smart thing. This rule changes over time with economic cycles too.
Heading into a recession, depression, or crisis you may want to have 12, 18, or even 24 months of reserves. This will buy you time to pivot. This is critical when addressing how to prevent cash flow problems.
Take A Minimalist Approach To Overhead
If you don’t absolutely have to have it to operate, then don’t sign up for it.
That can apply to office space, salaries, inventory on hand, company cars, and subscriptions. Try to avoid those fixed costs.
When you do need it, consider creative ways to minimize new demands on your cash flow. For example, offering key hires equity and options instead of a large salary and perks.
Don’t Get Ahead Of Yourself
The media loves stories of scale, but there are times for sprinting toward growth, and times to secure your position and finances. This is a good point when looking into how to prevent cash flow problems.
Be wary of stretching too far in expanding and taking on bills during some phases of the cycle. Be quick to right-size when the market calls for it.
Multiple Streams Of Income
If you only have one source of cash flow and that gets interrupted you can be in big money trouble fast. Whereas if you have multiple sources of revenue you may enjoy more consistent and resilient cash flow over time.
Cash Flow Projections
Cash flow projections are some of the first financial models and forecasts you work on as an entrepreneur. Then make sure you track and identify potential issues so that you can get ahead of them.
Hopefully, this post gave you a good perspective on how to prevent cash flow problems.
You may find interesting as well our library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.