As you run your startup, cash will constantly be moving in and out of your business. Having a cash management strategy will help you to protect your money throughout these inflows and outflows. A lot of work goes into raising money for a startup, especially when your startup is in its early stages. Don’t put your cash at risk by not having a solid cash management strategy in place.
Why do you need a cash management strategy?
A good cash management strategy matters in any environment, but it can be especially crucial during periods of macroeconomic uncertainty. If interest rates are low, you may need to be monitoring flow trends and optimizing your working capital so that your business requires less cash to actually operate. If interest rates are high, your cash can work harder for you and earn meaningful yield. Regardless of the economic climate, having a sound cash management strategy ensures that your money is held in a safe place and is less likely to be exposed to unforeseen risks.
What goes into cash management?
Mastering your cash management strategy means striking a balance between three main factors: liquidity, risk, and yield.
- Liquidity: How quickly can you access your money? Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price. Forecast your company’s financials and calculate how much capital you need over different periods of time. Doing this will help you to have access to a robust runway and minimize liquidity risk.
- Risk: Just as you would when running any other part of your business, it’s important to weigh the risk against the reward when making major decisions with your cash. As a founder, this might mean evaluating your own risk appetite as well as that of your investors and board. At the bare minimum, it’s important to ensure that the cash held in your bank account(s) is adequately insured. With an Accelerator Checking Account, you gain access to FDIC insurance up to $125 million
- Yield: Yield is a function of not only the security issuer and their creditworthiness, but also the maturity of the security or portfolio. Higher yield often means higher risk, so the key to sustaining safe returns is finding a sweet spot between high yield and low risk.
How to improve your cash management
There are several steps that you can take to better manage your cash flow, including:
1. Monitor your cash flow closely
Being aware of your money movement is an essential first step to any cash management strategy. By closely and regularly monitoring your cash flow, you will be able to more accurately prepare necessary statements and forecasts.
2. Regularly prepare cash flow statements
A cash flow statement provides an overview of how much cash is coming in and going out of your business. Putting together your cash flow statement can require a lot of data, so you may want to consider utilizing accounting software such as QuickBooks to streamline the process.
3. Create projections
A cash flow projection looks forward to the coming month (or months, quarter, etc.) and estimates what your cash flow will look like. It’s important that these estimates are based on actual figures. Having realistic cash flow projections can help you to invest your money at the right moment and account for any potential pitfalls along the way.
4. Have a safety net in place
It pays to have a safety net, especially when scaling your business. Investing in growth can lead to short-term negative cash flow which is perfectly okay, so long as you’re prepared for it. Having a cash reserve can help minimize the impact of cash flow problems and ensure that you have enough funds available for paying suppliers and staff.
5. Plan for the long term
Running a startup means always looking ahead. You may have a handle on your cash for now, but what about as you begin to grow out of the startup stage? Take some time to research and forecast potential changes in market conditions that could impact you in the future and be prepared to make adjustments to your overall strategy.
6. Stay on top of invoices
Unfortunately, you can’t always rely on customers to pay you on time. You’ll need to put in the effort to send invoices in a timely manner, set clear payment deadlines, send reminders, and chase up any late payments. Staying on top of these payments will help you to manage your cash flow more accurately and effectively.
Managing your cash flow well is vital in ensuring the financial health of your startup. Good cash management will not only protect your startup from collapse, but give it the necessary stepping stones it needs to grow and flourish.
By Michaela Lenahan in Startups