Running a startup can be a scary prospect. There are many expenses that are important; not to mention plenty of others that seem important, but actually aren’t. Even the savviest of business owners can fall victim to these misplaced priorities. In a survey of over 100 failed founders, 29% reported failing due to running out of money. That makes it the second most common reason for failure overall.
If you’re going to be one of the 10% of startups that actually succeeds, you’re going to need to control your cash flow. Businesses can’t win without cash flow—it’s as simple as that. To make things easier, watch out for these three warning signs that you’re losing control of this precious resource.
1. You Don’t Have a Plan for Expenditures
Flying by the seat of your pants may be the fun part of entrepreneurship, but it doesn’t work in every area. Paying attention to boring things, like budgeting, isn’t fun, but it is essential for business success. You can use a simple spreadsheet or a more complex business budgeting program. Whatever course you take, having a plan for money in and money out is crucial.
Ben Horowitz, a top venture capitalist, lays out the budget process many founders follow by mistake. Broadly, it starts with setting goals that enable the company to grow. Then, you assign ownership for those goals, refine them into measurable targets and estimate the cost of each effort. Unfortunately, this process leads to bloated budgets and unrestrained spending.
Instead, Horowitz suggests you put a number of constraints on your budget. Divide your budget into ratios that are appropriate across the team. Run goal-setting within a budget that was set first, and encourage managers to show their skills in meeting the budget needs while still getting great results. Putting the responsibility for managing the budget on your team as a whole minimizes your stress and helps you take control of your cash flow.
If you’re an early stage startup, there are a lot of different ways to bootstrap your different needs and control expenses. Sure, it’s not as fun as signing the lease on a fancy new office or signing up for every tool and service you think might be useful someday. Budgeting is hard work, but the satisfaction of staying within your company’s financial means is worth it.
2. Your Customer Invoices Are Unpaid Past 90 Days
Every business has its own payment terms, but almost everyone needs to be paid within 90 days. If your customer accounts are aging beyond that, that’s a clear sign that you could be heading for trouble.
Managing your accounts receivable in a responsible way is key to keeping cash flowing smoothly within your business. Simply put, how can you make your payments if you aren’t getting paid?
This is another part of the business that many founders consider boring and, as a result, it’s not uncommon to find that no one has been assigned to it. Founders think of ideas, HR managers hire and programmers code. So who takes care of your customer invoices? Be sure you add a CFO or business accountant to your team to ensure that someone is responsibly managing your accounting, payments and creditor needs.
If you can’t afford a CFO, you’re going to have to handle unpaid invoices yourself. Some important steps to take in managing accounts receivable include establishing credit policies and sticking with them.
In the early days of a company, it may be tempting to let a customer bend the rules, especially if you fear losing them. This leeway, however, sets a terrible precedent. Instead, stick to your policies. This is a business relationship; your customer will understand.
In addition, set up an invoice template and use it to invoice every month. This will help your customers remember that they’re coming due or are past due. Finally, be aware of your legal rights and be prepared to take action if a customer runs too late with their payment. It may be tempting to look the other way, but protecting your financial interests is essential to maintaining a healthy cash flow.
3. You Have Poor Financial Record-Keeping Practices
In the crazy early days of a startup, paperwork isn’t likely to be the top priority. Unfortunately, misplaced financial records can spell disaster for your company. Not only will you be unable to track down customer payments when they’re desperately needed, you’ll also struggle to know when your own bills are due. Without good financial record-keeping, you’ll lose control of your cash flow quickly.
Financial records are essential when it comes to establishing funding for your business, as well as when it comes time to pay the tax man. Without great records, you can’t get all the tax deductions you qualify for, putting your cash flow at even greater risk. Having a bookkeeper, CFO or business accountant is an important first step. As the founder, however, you also need to frequently review your financial records yourself.
Meet with your bookkeeper or business accountant and review your key financial numbers at least monthly—preferably weekly if you’re still in the early stages of your business’ growth. Make an effort to attend financial management seminars, or read articles on the subject that will help you understand your numbers more deeply. Learn which numbers, equations and figures are most essential to track.
Even promising startups can simply run out of money, as ARM server chip company Calxeda did at the end of 2013. In order to avoid this horrible fate, keep a close eye on your cash flow. If you have no plans for budgeting expenditures, collecting aged accounts receivable, or managing your financial records, consider those serious warning signs. Something has to change, or your company will fail.
If you’re ready to bring in more money, read our article on how to increase your cash flow.