Even when keeping to the best practices, managing cash flow can still be challenging for startups. On top of day-to-day operations, cash management can be daunting for founders.

Fortunately, Wise Business is able to help. We offer easy international transactions for businesses, getting your payments to you quickly and securely—keeping you on top of your cash flow.

Table of contents

Cash Flow Management for Startups: Tips and Techniques 7 Common Cash Flow Problems for Startups 1. Late customer payments 2. High fixed costs 3. Inaccurate forecasting 4. Lack of financial planning 5. Insufficient capital 6. External factors 7. Rapid growth Cash Flow Management Strategies 1. Manage your spending 2. Establish good revenue practices 3. Diversify your client base 4. Maintain cash reserves 5. Forecast regularly 6. Plan effectively Managing cash flow with Wise Business

Cash Flow Management for Startups: Tips and Techniques

Research suggests that approximately 90% of startups fail—and 29% fail because they run out of cash.¹

Any business owner will recognize the importance of having enough cash on hand to pay employee salaries, cover inventory costs, and manage other related expenses. With limited cash generated from operations, startup founders need to manage their cash flow even more carefully; however, this is easier said than done.

This article covers the most common cash flow problems experienced by startups and provides actionable insights to help manage their financial needs.

For startups looking to expand into international markets, opening a Wise Business account helps avoid costly transaction fees when transferring money abroad.

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Save Time and Money On Overseas Payments With Wise Business

Wise Business can help you save big time on international payments.

Wise is not a bank, but a Money Services Business (MSB) provider and a smart alternative to banks. The Wise Business account is designed with international business in mind, and makes it easy to send, hold, and manage business funds in currencies.

Signing up to Wise Business allows access to BatchTransfer which you can use to pay up to 1000 invoices in one go. This is perfect for small businesses that are managing a global team, saving a ton of time and hassle when making payments.

Some key features of Wise Business include:

• Mid-market rate: Get the mid-market exchange rate with no hidden fees on international transfers

• Global Account: Send money to countries and hold multiple currencies, all in one place. You can also get major currency account details for a one-off fee to receive overseas payments like a local

• Access to BatchTransfer: Pay up to 1000 invoices in one click. Save time, money, and stress when you make 1000 payments in one click with BatchTransfer payments. Access to BatchTransfer is free with a Wise Business account

• Auto-conversions: Don't like the current currency exchange rate? Set your desired rate, and Wise sends the transfer the moment the rate is met

• Free invoicing tool: Generate and send professional invoices

• No minimum balance requirements or monthly fees: US-based businesses can open an account for free. Learn more about fees here

Use Wise Business >>

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7 Common Cash Flow Problems for Startups

It’s important to remember these seven common cash flow issues as you get your startup off the ground and give it the best chance to succeed.

1. Late customer payments

A client might fall behind on its payment schedule for reasons beyond your control. Often, founders miss when clients might only operate on extended payment terms—and are left without expected cash flow. In either case, late customer payments can leave startups in a very difficult position.

Your startup will base its plans on monthly and quarterly cash flow projections, so even one late payment from a customer can harm your business. This may force you to cut back operations, find short-term money market funds or use personal funds to keep the company afloat—all dangerous risks for a startup.

2. High fixed costs

Fixed costs can add up quickly for a startup. Companies need to account for software subscription fees, office space rent, utilities, and many other fixed costs that account for a consistent cash outflow.

Fixed costs can often exceed what is essential for a business to operate. For example, a startup may invest in physical office space to project confidence to investors—even if work could be done remotely. Employee perks can also add up quickly, even if they help to attract talent to your company.

Given that your startup’s infrastructure has to be built and maintained to secure new business, fixed costs are a necessary expense. However, they can quickly drain your starting capital as well as any new cash flow generated from operations.

3. Inaccurate forecasting

Revenue and cash flow forecasting is essential to planning the success of your startup. Forecasts predict business growth based on known market trends and needs. A forecast of where your startup plans to go over the next three years allows you to pitch investors and chart your business operations successfully.

However, any forecast can prove to be inaccurate for a variety of reasons. Markets can grow or shrink unexpectedly, changing the scale or focus of your client base. Thus, you may have planned for more or less cash flow than you realize. Your startup might struggle to deal with the reality of your cash flow, making it difficult to balance expenses and deliver on client obligations..

4. Lack of financial planning

A financial plan maps out how your startup will use its finances to grow effectively. Using forecasting tools and analyzing market trends can help you make realistic plans for the future of your company, including projections for growth and contingency options.

A lack of a plan means your cash flow will not be managed and invested effectively, potentially putting your business behind the competition. Cash is the heart of any startup, so a lack of a solid management strategy places your assets at risk.

Unplanned finances can also leave your business more vulnerable to unforeseen changes in your market and the larger economy. Markets can change quickly, so any issues that arise can damage the ability of your startup to operate and effectively adjust.

5. Insufficient capital

Capital investment is necessary to get your startup off the ground in the first place. However, having cash on hand remains essential as your startup continues its journey. You should keep enough cash on hand for at least three to six months of forecasted expenses.

Insufficient reserves can leave your startup open to changes in the market without a cushion. Keeping a reserve of cash allows for companies to maneuver effectively when faced with unforeseen circumstances. Cash reserves can be built up either through a larger initial investment or through careful saving of cash flow during operation.

6. External factors

Startups are not immune to changes both in their field and in the larger economy. A bear market, for example, might scare away potential investors and clients. Market downturns can drive away potential customers and drive existing customers to cancel their contracts to cut costs.

Your company might also face unexpected competition, whether from another startup or from a larger corporation. This may result in your business having a much smaller market reach than expected. Also, related technologies can change quickly—either in your favor or against it. In any case, though you can certainly plan for the future of your startup in relation to its target niche, it is impossible to predict the market perfectly.

7. Rapid growth

Success is the dream of every startup. However, too much success too quickly can pose its own problems for businesses. Scaling your company up—adding new employees, purchasing more equipment, building infrastructure—takes both time and money.

Growth must also be balanced with your company’s day-to-day operations. Being unable to deliver on contracts as promised hurts customer confidence in your business. Having to decline contract offers can lead potential clients to look elsewhere for their service needs. Though demand may be high for business, your reputation can suffer while your operations scale up.

Many startups solve this problem by seeking funds on the money market and through outsourcing. Though these may look like easy, quick fixes have drawbacks. Looking for cash can put your business into debt or can involve losing control through equity investments. Outsourcing can put essential aspects of your company’s cash management in the control of people outside of your team, who might be less familiar with your practices and goals.

Cash Flow Management Strategies

Fortunately for entrepreneurs, there are a variety of cash flow management strategies for startups. Here are six common practices that can help your startup succeed.

1. Manage your spending

Good spending habits must include both founders and their employees. Establishing clear policies for expenses from day one keeps your team on board with sound financial practices. Also, solid record-keeping needs to include everyone in your business. Keep receipts, record expenditures, and reconcile your books frequently.

Credit cards are a common cash flow management tool for company expenses. Each credit card policy is different, so it is important to research the best one for your startup. A credit card allows for payments to be postponed—often with no penalty for one to two months. Establishing yourself with a reliable creditor helps to build relationships with bankers that may come in useful should further cash flow issues arise.

2. Establish good revenue practices

Cash flow is a two-way street. It is important to pay as much attention to revenue as expenditures. Being proactive about your revenue streams keeps your clients on the same page as you, helping to avoid unexpected income shortfalls.

Establishing clear payment terms upfront makes clients aware of your contract expectations. Prompt invoicing—at the start of the month—gives customers time to make their payments. If a client misses a payment, it is essential to follow up on the issue rather than letting it go. Revenue is the lifeblood of any startup, so ensuring payments come in on time as expected is critical.

Experimenting with different revenue structures can also help your startup. For example, if positive cash flow is needed quickly, a discount on a longer subscription term can bring in prompt cash flow. Discounted or free trials of your product are another way to attract customers quickly. Though you will miss out on some revenue, trial policies get clients in the door and used to what your startup offers.

3. Diversify your client base

A large client base provides a cushion against revenue shortfalls created by missed payments and canceled contracts. One lost revenue source is proportionally less of an issue if your startup has fifty clients than if it has ten. Expanding your sources of positive cash flow acts like insurance against unexpected changes in revenue.

Diversity in clients is also a form of protection against changes in revenue. Reaching customers in multiple fields of the economy keeps a downturn in one sector from affecting your startup severely. A diversified client base gives your business more confidence in its revenue sources and resilience against market changes.

Diversifying is also an important path to follow early in your startup’s lifetime. Overdependence on a client or type of client can shape your company’s trajectory, as structures and hires will be focused around serving that single customer base—leaving your business open to vulnerability down the road. Because of this, it is essential to build a diversified client base.

4. Maintain cash reserves

Industry experts recommend keeping at least three to six months of payroll in reserve at all times. This allows your startup to keep its employees on board without dipping into your personal funds—or having to let team members go because of minor market fluctuations.

Cash reserves can protect your startup against the risks of quick financing. Backup capital means you won’t have to look to money market funds or equity sales to keep your business afloat—leaving your company with less debt and more control. A cash reserve can help your startup survive market fluctuations and revenue issues.

5. Forecast regularly

Cash flow forecasts are predictions of revenue and expenditures based on market conditions and business performance. Like a weather forecast, a market forecast is subject to frequent change. This makes regular forecasting an essential tool for startups to stay competitive in ever-changing business fields.

Regular forecasts take into account changes in the market your startup is approaching. As competitive industries can change rapidly, these frequent updates are a necessary effort to keep projections accurate and useful. A good forecast will take advantage of the latest trends to model the financial future of your startup. This information allows for accurate planning as well as giving investors and clients the facts they need to work with your business.

6. Plan effectively

A good plan outlines expected cash flow, growth expectations, and contingency options. Plans are useful in pitches to potential investors and clients.

Effective plans map out the future of your startup for a set period of time, often three years. Planning your projected cash flow allows for it to be managed with more confidence, giving you the tools your startup needs to build for the future.

Should any market changes arise, your plan should also include contingency options. These will give your startup well-thought out actions to follow—giving you and your business peace of mind. Contingency plans also save your company from panicked or reckless decision-making, keeping you in control of your project.

Managing cash flow with Wise Business

Even when keeping to the best practices, managing cash flow can still be challenging for startups. On top of day-to-day operations, cash management can be daunting for founders.

Fortunately, Wise Business is able to help. We offer easy international transactions for businesses, getting your payments to you quickly and securely—keeping you on top of your cash flow.

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Sources:

1. 90% Of Startups Fail: Here's What You Need To Know About The 10%