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  • Writer's pictureHnO Consulting

Cash Flow Management for Startups: Strategies & Tips from HnO Consulting

We've all heard the adages about cash, so I figured I'd spare you those and instead prompt ChatGPT to create a couple. I also prompted it to make a limric I'll share at the end of this post.

  • Cash is king... and queen... and the entire royal family for startups

  • A startup without cash is like a car without gas - it might look nice, but it's not going anywhere

  • A startup's cash flow is like oxygen - you don't notice it until it's gone, and then you start to panic

Or, as the cartoon character Wimpy famously quipped "I'd gladly pay you Tuesday for a hamburger today"

Cash... cash flow forecasts... 13-week cash flows... there's something about it all that just makes my chest feel a little tighter and my throat a little constrained. It's all fun-and-games until your model tells you that you have a gaping hole in the bank between today and your rosy future... assuming you have a model. Otherwise, it might be the bounced checks that tell you.

So, as a startup, it's essential to have a solid grasp of your cash flow to ensure that you can cover your expenses and invest in growth. But let's be honest: cash flow management is one of the most common financial challenges that startups face. If financial modeling is tough, cashflow can be daunting. The devil is in the details, and the details matter. In this blog post, we'll share some tips on how to manage cash flow as a startup.

Forecast your cash flow

It all starts with this. One of the best ways to manage your cash flow is to forecast it. It seems sort of obvious when written, but this can actually be quite challenging to do.

Starting from your financial model and then tweaking it to address the actual timing of cash in and out can be painstaking but worth the effort. A 13-week cashflow forecast is quite common and gives a nice forward-looking view of cash. Our opinion, given that so few things are printed on paper these days, there's no reason to limit it to 13 weeks. Let that baby go on out for two years or more. There's really no reason not to, and it helps to identify potential tight spots sooner regardless.

Ultimately, cash flow forecasting allows you to anticipate your future minefields, so you can identify potential cash flow issues before they arise, and make any necessary adjustments. Also, accurate cash flow forecasts will often provide you with actionable insights into your financials.

Monitor your cash flow regularly

It's not enough to create a cash flow forecast and forget about it. As with a budget, you are well served to monitor your actual cash flow regularly to ensure that it aligns with your forecast. Quickly identifying discrepancies is key to help take corrective action - and also maybe revise your forecast. Tracking your cash flow in real-time will help prevent those most gut-wrenching moments.

As noted in a previous post, having a cloud-based accounting system that is linked to your systems will help with early detection and course correction.

Plan for contingencies

As a startup, it's wise to plan for contingencies, such as unexpected expenses or revenue shortfalls. It's essential to have a cash reserve that you can tap into if you encounter any unexpected challenges. Figuring out what contingencies exist, how great of magnitude impact they can have, and then potential solutions to address it can be tough, but it's time well spent.

Implement cash flow best practices

There are several best practices that you can implement to manage your cash flow effectively. For example, you can negotiate better payment terms with your suppliers, invoice promptly, and incentivize customers to pay early.

But not all companies are the same, and not all vendors/suppliers are the same. Sometimes, negotiating less favorable terms can create real financial value if your business partner is themself cash-strapped.

For example, I had a client which had negotiated a 2% discount with a customer if the customer were to pay Net-10 (pay within 10 days of the invoice issuance - in this case, month-end). At the time, it was probably a well-intentioned way to improve working capital. But when framed to the CEO in terms of an effective APR, and quantified in dollars, they quickly stopped the practice.

In conclusion, cash flow management is critical for startup success. At HnO Consulting, we specialize in helping startups manage their cash and finances effectively, so they can focus on growth. Contact us today to learn more about how we can help you master your cash flow and achieve your financial goals.

And now, as promised, the cautionary limric from ChatGPT - may it not be the fate for your startup!

A startup that lacked enough dough,

Was sure to quickly hit a low,

The bank refused to lend,

No hope left to defend,

And so it met its bitter end.

Disclaimer: This blog post was authored in part by ChatGPT, a language model trained by OpenAI, based on the GPT-3.5 architecture. While the content has been created with the input of ChatGPT, it has been reviewed and edited by a human writer from our team at HnO Consulting to ensure accuracy and quality.

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