When you’re just starting out, it’s important to remember one thing (well, a lot of things, but this one is really important). CASH is king. Why? In the early stages of a business, traditional financing may be hard to come by, so cash in hand is necessary to run your business.
You guys are really on the cash bandwagon.
Sure are. When you have limited financing as a startup, cash is a necessary commodity. You need it to pay vendors, make payroll, fund product or service development and buy equipment. You know, the kind of important stuff it takes to make sure your business is actually running.
Plus, cash can really benefit you in way of discounts. Some vendors may offer purchase discounts in return for prompt payments.
Okay, okay. Cash is important. So what do we need to watch for?
You can’t just use all your cash in hand to pay all your expenses. While you need to pay your bills and keep the lights on, you also need to be able to survive slow periods (all businesses have them) and be prepared for when cash is not coming in.
But you also need to prepare for when times are good. When growth is strong and increasing revenue generates higher inventory and receivables, you have to be prepared to meet demand. Increased working capital needs can consume cash, especially in periods of high growth.
What else should I pay attention to?
What industry are you in? Industry sectors can have an impact on when you collect cash and when you spend it. Some industries have the benefit of collecting cash early in the sales cycle. Think schools here. They collect tuition before classes even start. Other industries require spending cash early in the sales cycle. We’re looking at you manufacturing and wholesale. So examine your entire sales cycle when mapping out your finances and know that no two businesses are exactly alike.
Plus, while it might not seem like it when you’re just starting out, but you may want to acquire other businesses down the road. You’ll need cash to do this.
So cash is a good thing. Can I do anything to get a handle on it early?
Monthly projections can help you understand your cash cycle. Look ahead to periods of high cash outflow and plan. Take into account periodic events like taxes, bonuses, capital expenditures, prepaid expenditures and one-time events and account for them. Cash will not only help you in the early stages of your business, it can also be a catalyst to map out your overall financial journey (which we think is pretty fun, and a really good thing to do).