Cash management plays a pivotal role in the success of startups and early-phase businesses, especially in today’s economy.
During the early stages of the business, startups often face a period of negative cash flow. A survey by CB Insights found that it takes an average of about 3.8 years for startups to become profitable. The study also found that the median cash burn rate for startups is around $135,000 per month. It’s clear that managing cash effectively during these early stages can be the difference between success and failure.
Here are a few ways startups can better manage their cash:
Consistent Reporting and Tracking
Regular cash management allows businesses to have a clear and up-to-date understanding of their cash position. By monitoring cash flows on a weekly basis, businesses can track their incoming and outgoing funds, identify any potential cash shortfalls or surpluses immediately, and make informed decisions based on accurate financial information.
Take Control of Your Cash Cycle
Understanding your cash cycle involves analyzing the time it takes for cash to flow into and out of your business. It typically consists of three main components:
- The average time it takes for your customers to pay you
- The time it takes to convert inventory into sales
- The average time it takes for you to pay your suppliers
Consider strategies to reduce the accounts receivable period, optimize inventory management, and potentially extend the accounts payable period to improve your cash flow position.
Establishing internal controls, particularly around paying bills, promotes accountability within the organization and reduces errors or discrepancies that could impact cash management. An effective bill pay process ensures accuracy in recording and processing payments. It establishes clear procedures for verifying invoices, approving payments, reconciling payment amounts, and maintaining supporting documentation.
In the current economic landscape, characterized by uncertainties and market fluctuations, cash management becomes even more critical. At CFOx, we help companies closely monitor their cash position, accurately forecast cash inflows and outflows, and make strategic decisions to optimize cash utilization.