The startup’s guide to cash flow management

5 min read

Startups and small businesses dominate the Australian economy, but economic woes are spelling trouble, according to the most recent Small Business Nation report from McCrindle Research. Cash flow management for startups 

Those organisations employing fewer than 20 workers and in operation for less than four years are considered the backbone of the Australian economy, simply due to the immense number of businesses that fall into this category. The McCrindle study found that a massive 9 out of 10 local businesses employ less than 20 workers.

However, a significant number of these small enterprises won't see more than four years in operation. Of all the new businesses that launched in 2009, almost half (49 per cent) were no longer active in 2013.

In fact, of the more than 2 million total organisations (of all sizes and shapes) operating in Australia four years ago, over a third (38.2 per cent) had closed within four years. The McCrindle study revealed that the longer a business is in operation, the higher its chances of long-term survival, which is discouraging news for startups across Australia.

One of the most significant factors that determines whether a business will be successful is cash flow management. Sustainable incoming revenue is the lifeblood of any enterprise and can be the difference between failure and prosperity.

Even if your company is doing well in sales and recording profits each month, delayed payments or high outgoing costs can spell trouble for any startup.

Effective cash flow management is about maintaining a balance between receiving income from clients and sending this money out to cover your own expenses. To help you achieve healthy revenue systems, here are three important cash flow management tips for startups and small businesses.

Understand incoming and outgoing funds

While any business owner knows the importance of measuring incoming revenue and profits, some organisations fail to effectively manage their outgoing expenses.

If your bills and invoices are stacking up in comparison to the number of sales and customer payments you are receiving, you may soon find your business struggling to stay afloat. It is therefore crucial that your cash flow management strategies focus not only on incoming funds but also on outgoing costs.

A simple way to measure whether your business is floundering is to keep track of how much cash you have in hand at any one time. If you continually find yourself struggling to scrape together the funds to pay bills and expenses, you might want to consider cutting costs.

Encourage clients to pay faster

Each time you take on a new customer or attract a sale, how long does it take for the money to find its way into your business accounts?

If clients are waiting until the very last moment to complete their invoiced payments, the lack of regular cash and timely income can cause your business to struggle. When you have your own bills and expenses to pay, late client payments can lead to you being charged penalties for missing invoice deadlines. 

Fortunately, encouraging clients to pay on time or even early is not difficult when you invest in an automated payment solution, such as direct debit for businesses. A direct debit system can help ensure payments are made punctually due to the ease of use for consumers and the complete automation of payment collection.

Keep money coming in

Once you have made a sale, that does not mean the end of the relationship with your customer. Continually having to attract new clients to your business can be a costly and time-consuming endeavour.

It is therefore crucial that you have policies in place to retain customers and encourage repeat purchases. For instance, you may wish to invest in a recurring revenue model, such as a subscription system or sunk-money consumables.

Ensuring your startup's cash continues to flow is a key consideration for surviving beyond the first few years of operations. Fortunately, with simple and effective recurring revenue software and systems available, managing this process doesn't have to be a challenge.