Managing cash flow is crucial for the success of any new business, and learning from experienced professionals can make all the difference. In this article, I've gathered invaluable tips from CEOs, founders, and other business leaders, ranging from maintaining a 2-1 cash-flow ratio to safeguarding against late payments, to help your new business thrive.
Maintain a 2-1 Cash-Flow Ratio
"I remember my first year in business. A lot of entrepreneurs can make the mistake of playing business before they really have a business. Leasing space, hiring staff, and even buying expensive office supplies long before a dollar comes in the door.
"It can be helpful to have an idea of where they want to be located and even begin interviewing prospective hires. However, it may be wise to have a 2-1 ratio of cash coming in the door before cash starts going out to pay for these expenses.
"A 2-1 cash flow ratio, also known as the cash-flow coverage ratio, indicates a company's ability to meet short-term debt obligations with operating cash flow. A ratio of 2-1 means the company generates twice the operating cash flow needed for immediate financial commitments, signifying financial health and stability.
"In a new business, achieving this ratio can require meticulous financial management, realistic revenue projections, cost control, efficient operations, and prudent credit and inventory management. Maintaining a cash reserve for unforeseen expenses can be essential. By following these strategies, a new business could lay a solid foundation for growth."
—Jon Kozesky, President, Jon Thomas Consulting
Utilize Business Credit Cards
"One of the cash-flow challenges when starting a new business is the outflow of cash to pay for items such as inventory, marketing, insurance, rent, utilities, and staff when you are not yet taking in the necessary revenue.
"A good business credit card can help you pay for rotating expenses like inventory and utilities so you can continue to order and function at full capacity while concentrating on building clients and sales. Some credit cards also offer perks like cash back and bonus offers, which may also help your business's cash flow."
—Bruce Tasios, CEO, Tasios Orthodontics
Monitor Billing and Negotiate Terms
"At our business, we prioritize effective cash-flow management through several strategies. First, we closely monitor our billing process, ensuring that subscription payments are promptly received. We actively review pending invoices on a weekly basis and proactively follow up with customers to ensure timely payments.
"To maintain financial reserves and enhance our runway for growth, we emphasize annual subscriptions over monthly ones. By securing longer-term commitments from customers, we generate more predictable cash flow. Additionally, we negotiate with our vendors to establish a billing cycle of at least 30 days, granting us greater flexibility in managing our cash flow.
"These practices have proven beneficial for Mailmodo, allowing us to build and scale our operations more rapidly while maintaining financial stability."
—Aquibur Rahman, CEO, Mailmodo
"While it's great to have a budget that covers the next five or even ten years, it's likely that you'll find yourself engaging in last-minute pivots." —Linn Atiyeh, CEO, Bemana
Extend Cash-Flow Projections
"When your brand-new business has unreliable or limited revenue, you can manage cash-flow risks by extending your projection period. By looking ahead to what cash needs and issues will arise over the next 3, 6, and 12+ months, you may be better positioned to project how much cash you’ll likely need.
"Your projections can’t guarantee you won’t run into issues, but they can help you find potential pain points and cash-flow inequities that could harm your business before it has the time it needs to grow and thrive.
"Long-term projections give you the lead time you need to balance receivables and payables or secure any future financing you might need to manage cash gaps, like short-term loans or money transfers."
—Anthony Martin, Founder and CEO, Choice Mutual
Improve Pricing Structures
"New businesses may want to look at their margins and improve them to efficiently manage cash flow and stay afloat during the growth phase. Looking at the pricing of your products/services can be one of the easiest ways to maximize margins and profits.
"By keeping the focus on optimizing your pricing in real time, your business may have a better opportunity to thrive with a healthy cash flow."
—Cath Brands, Chief Marketing Officer, Flintfox
Speed Up Receivables Collection
"One of the toughest challenges a new business may face isn’t just growing sales – it’s accelerating the collection of those funds once a sale has been made. Cash inflows being throttled by overly generous collection terms could have a detrimental effect on a new businesses. That is why it may be a best practice to accelerate the collection of receivables with net terms that encourage customers to pay quickly.
"If 5% 10, net 30 is common in your industry, perhaps consider giving customers 10% 5, net 15 terms. This may not only incentivize customers to pay more quickly, but it also attracts new customers with favorable discounts.
"Managing your cash flow effectively during the early stages of your company’s growth can be more important than maximizing profit margins. This structure worked incredibly well for us during our first year in business."
—John Ross, CEO, Test Prep Insight
Focus on Margins and Revenue
"I often see new businesses launching with strategies focused on dropping prices. This could become a path to financial struggle. Businesses may want to try to charge higher prices instead of competing with lower prices. This may lead to increased customer churn in the short- to mid-term, but the increase in margins can mean that you end up with more cash flow.
"To increase prices and try to keep churn in check, you ideally may need some pricing power, which could include a strong brand and reputation, intellectual property protection, or access to limited resources.
"In my experience, a great way to get pricing power is through the combination of reputation and trade secrets, i.e. your know-how. Consider becoming the best-in-class at what you do so that others can’t compete with you.
"The value of your business isn't about the lowest price offering. It's about the ability to generate cash flow. Cash flows are dependent on margins. By focusing on margins and revenue generation, your business could thrive."
—Rafael Sarim Özdemir, Founder and CEO, Zendog Labs
Optimize Collection and Payment Speeds
"Business owners could face a problem when they owe vendors payments but are waiting for clients to fulfill invoices. This can create a cash-flow disruption. You simply can't pay a bill with money that hasn't arrived yet. As a new business in particular, if you can increase your collection speed and decrease your payment speed, you may have more working capital available.
"To accomplish this, you may try shortening your invoice payment terms so clients pay more quickly, or offer an early payment discount to encourage faster payments. Electronic payment options usually make cash available more quickly as well. Additionally, if you don't pay off your vendors too early and opt instead to make payment on the invoice due date, this could also help improve your cash flow."
—Gates Little, President and CEO, altLINE Sobanco
Prioritize Flexible Credit Terms
"When I launched my firm, I did a lot of learning on the job, especially when it came to credit options. One thing I discovered the hard way is the value of flexible terms.
"Running your own business is a lesson in the limits of planning. While it's great to have a budget that covers the next five or even ten years, it's likely that you'll find yourself engaging in last-minute pivots. The broader economy is hard to predict for even award-winning economists.
"So when you're discussing credit options with your banking partner, it may be advisable to ask about the flexibility of terms. Will you be able to extend your amortization without a fee? Is there a penalty for paying off a loan early?
"Business debt can be a tool to help you grow. Finding a product that meets your changing needs may allow you to shift with the market."
—Linn Atiyeh, CEO, Bemana
Rent Equipment to Ease Cash Flow
"As an experienced businessman, one trick I have found incredibly helpful is renting equipment, rather than buying it outright. I remember when I was starting my first training workshop, instead of spending a big chunk of my limited funds on purchasing new computers, I opted to rent them.
"This not only saved me from an upfront hefty expense but also allowed me to adapt quickly as technology advanced. Therefore, my advice to any burgeoning business owner would be to consider renting equipment or machinery before you take the plunge and buy. It could significantly ease your cash flow, while still meeting your business needs."
—Derek Bruce, First Aid Training Director, Skills Training Group
Safeguard Against Late Payments
"We have been stung by clients going into liquidation, and so we have put in several measures to protect ourselves. We now carry out credit checks on new clients, we insist on payment before delivery on small budgets, and we limit the amount of credit we give to our customers.
"We have also had issues with late payments, and email reminders were getting us nowhere. We have since assigned one of our team with following up on outstanding invoices daily. By building strong and personal relationships with our clients' finance managers, we have dramatically reduced our late payments and improved our cash flow, helping us avoid the need for costly borrowing.
"As a new and growing business, new clients are so valuable and exciting that it can be easy to deprioritize ensuring you will get paid. We lost about £30,000 to bad debt, and so I would encourage any businesses to implement these measures well before they think they need them."
—Kim Allcott, Partner, Allcott Associates LLP
