When you’re a startup, how you manage your cash flow can make or break your business. And if you are an actively growing startup, cash planning becomes more critical as you build the business and look to outside investors for funding.
Have a Solid Plan:
The best plan of attack when managing the cash flow for your startup is to plan ahead. Understanding what is coming in and going out the door before its happening will arm you with the knowledge you need to make informed decisions.
It’s a good idea to develop an annual plan so you understand what your key initiatives are and the timing of cash related to those initiatives. If you are actively growing, we recommend building out a twelve month forecast at minimum. If you're seeking outside funding, you can expect to need a three to five year plan. You can read more tips on developing an action plan for your startup here.
As you're growing, a solid plan will help you visualize the cash needs related to your long-term initiatives. For instance, you may need to hire new employees, get a larger space, purchase equipment or invest in marketing prior to revenue coming in the door. Once you know your initiatives and the timing of the various elements of your plan, you can get a clear picture on what your cash needs will look like so you can plan ahead.
Have Clean Books:
If you are actively working to grow your startup, its critical that you have a reliable set of books. A clean set of financials are the backbone of your business and impacts your ability to make timely and informed decisions.
Clean books also help you look ahead. By having a timely and accurate set of books, you can understand how the financial components of your business fit together, and have a historical view of trends which help you build informed financial forecasts, ultimately impacting the accuracy of your long-term cash forecast.
Its a good idea to get a Bookkeeper in the early stages of your startup, and build your financial team as you grow. You should start by making sure all of your financial data is being recorded and reconciled in an accounting package like Quickbooks Online or Xero. As your business grows, you should consider adding a Controller that can close your books monthly, make sure your financials are presented accurately, and help you build detailed financial forecasts.
Keep Your Personal Stuff out of the Business:
A lot of owners try to “slide” personal expenses into the business. Setting aside the obvious legal and ethical issues of this practice, using your company as a personal piggy bank will only work against you as you’re trying to grow the business.
Not only will you be paying your accountant to sort out your personal expenses from your business expenses, the picture of your actual business performance becomes muddy. Even if you were to keep the personal expenses off your income statement, your business is still spending the cash, leaving you constantly scratching your head wondering where all cash is going. Worse, if you do try to slide it through your income statement, you no longer understand what resources your business truly needs to operate.
Its better to anticipate your personal cash needs and build this into your forecasts as a regularly scheduled owner salary or owner draw (depending on your legal structure). That way, you specifically know what you are taking out of the business for personal use versus what cash you need to actually operate the business. The last thing you want is to try to explain to a potential investor is why you are using the business account for your piggy bank. Not only does this make you look unprofessional, but it reduces their faith in your ability to responsibly grow the business.
Investors Rely on Cash Forecasts:
If your startup is growing and you are looking for outside investor funding, a solid cash forecast will be a critical element of your discussions with potential investors. They will want to know what both your short-term and long-term cash forecasts look like. They’ll also want to understand the various elements of your forecasts. For instance, they will want to understand when you can expect sales to increase, understand what staff you will need to hire and how your variable expenses change with your sales volumes. They will also want to know what cash comes from operations, versus the cash you need for capital purchases like equipment, or large one-time expenses like legal fees related to patents.
If you are serious about growing your startup, its best to think about cash planning in the early stages of your business. As your startup evolves, it will increase your opportunities for success and make you better prepared for discussions about cash needs with potential investors.
