5 Cash Flow Strategies Every Startup Needs to Implement Now
While profits are the ultimate measure of business survival, cash flow is what keeps a business ticking along day by day. In this rapidly-shifting economic environment, never has it been more true that cash flow is the most important indicator of a business’s health. However, keeping cash easily accessible can be a complicated affair, particularly for startups. I spoke with five seasoned finance and operations advisors* to gather their strategies for creating and maintaining a reliable cash cushion.
1. Stash a percentage of revenue, every time
Dorothy Kolb admits to an early error that plagues countless new business owners: operating from one checking account. “When tax time came around, I caught myself off-guard and had to find the money quickly.”
The small business financial strategist and founder of dk east associates recommends keeping a piece of revenue “out of sight, out of mind.”
“Take a portion and put it in a separate account for hard costs/direct costs. Move some into an account for taxes and profits. Your operating account will show only what you have available for normal monthly expenses.” Kolb benefitted from this disciplined strategy when the pandemic upended many businesses. “When COVID hit, I had a cash reserve to tap into until things started to right-side themselves again.”
2. Measure lead conversion
Growth strategist Celia Arias has a tried-and-true philosophy: “What gets measured gets managed.”
Arias focuses on lead conversion, coaching her clients to build “measuring muscle.”
“Measuring each step is key. By knowing your conversion rate at every step of the customer journey, you understand where to focus within your process. We think we need more leads, but first we need a plan for converting leads.” The founder of Chella Industries advises a smarter approach to leads. “Create a simple dashboard to understand your leads, how they convert to sales, then how they convert to success stories. Sometimes, we feel like we need to climb a mountain. But, often, you don't need more leads - you need to maximize the leads you have.”
3. Assess your “cash runway”
As a CFO for technology startups, Neeta Shah is deliberate in assessing her clients’ “cash runway” - simply put, the estimated time when a business will burn through its capital. “Tracking cash runway allows you to look into the future and see when your cash will run out, given your current burn rate. For example, for technology startups, fundraising for the next round should start with an 18-month runway, giving you 12 months to get traction with quality investors, and then 6 months to raise your next round.”
At Startup CFO Solutions, Shah helps her clients - tech companies that spend quickly - toward financial success using the cash runway method. Business owners in all industries should take note. “Assessing cash runway each week drove spending improvements and added much-needed urgency to fund raising.”
4. Spend for sales, not leads
One obvious way to improve cash flow is to boost revenue. But how? Business advisor Camille Nisich says startups should capitalize on sales at the earliest point in the customer journey, especially when investing in paid lead generation. “A potential customer is most excited about your offer at the point of lead generation, so why not make them an offer right then and there?”
The founder of Camille Nisich Consulting shared the example of offering new leads a discounted paid offer. “It’s important to move quickly toward a sale so you can make the best decisions on the effectiveness of your paid media efforts, even if the sale is nominal. The leads you convert will drive down your CAC (cost acquisition cost), and be more likely to take an upsell.”
5. Build a relationship with your bank
Revenue growth strategist Sheela Gonsalves wants entrepreneurs to treat bankers like business partners. “Bankers understand the traditional credit market and know where favorable terms exist.”
The founder of Prism Brand Advisory advises business owners to keep their banker updated about plans and goals. Bankers can help entrepreneurs navigate changing cash flow needs by negotiating fees and recommending better products. “It’s helped me find financial resources that I was unaware of and troubleshoot operational mishaps that would have taken longer to fix through a customer service line.”
The bonus? Bankers can be a great resource for networking. “By building a relationship with my banker, I have been able to establish connections with potential customers and business partners.”
*The entrepreneurs in this article are members of The Upside.
Erin Halper is the founder and CEO of The Upside, an award-winning accelerator and community for consultants and industry experts who support and advance one another in business. Since launching The Upside in 2017, Erin has advised thousands of professionals on how to redefine the 9-5 by building a respected consultancy practice that generates consistent clients and affords them the freedom of working when, where and how they want. Prior to launching The Upside in 2017, Erin built a 7-year independent consulting career providing marketing expertise to her private equity, real estate investor and hedge fund clients, collectively resulting in more than $3 billion in outside funding and deal sourcing.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.