Being a startup founder is not always glamorous and exciting. There are challenges to face, especially when the startup is growing rapidly. Growth is hard work; you have to fill strategic positions, make sure the company is sound financially, and tackle other challenges along the way.
One of the most important things to keep an eye on when managing a startup is cash flow. It is easy to fall into the trap of spending more than you can afford. This will only lead to difficult times and potential failures.
Cash flow management doesn’t have to be complicated. These next several tips and tricks will help you keep your cash flow healthy without any hassle. Let’s get started, shall we?
1. Manage Your Risks
One of the first things you need to do is manage financial risks. To have a healthy and predictable flow of cash, you have to make sure that there are no sudden disruptions to your finances. This is where taking precautions becomes a must.
Small business insurance and other insurance coverage are perfect for protecting your startup from financial risks. You will be able to offset some of the financial risks that your startup faces with the help of small business insurance and coverage, such as business income insurance. Thanks to The Hartford, finding small business insurance is incredibly easy. You also have the option to use the company’s online tool to get the best coverage for your money. The more risks you face, the more you can rely on insurance.
2. Build a Cash Reserve
Speaking of managing risks, another thing that must be done to make a startup more resilient to issues is building a cash reserve. As mundane as it may sound, a startup needs to have at least six months of runway – a reserve of cash that allows the company to operate without income – to be healthy.
A 12-month runway is ideal, but anything beyond that means you are not growing the company fast enough; this is usually a red flag for potential investors. Six is the magic number. Six months of runway make managing cash flow incredibly easy.
You can be more flexible with your ARs and APs when you can operate smoothly for six months, regardless of expenses and revenues. The more options you have, the easier it will be to build financial strength and secure a better future for the company.
3. Scale Up Alongside Your Financial Strength
Even when you are pursuing high valuation, growth is something that needs to be approached with extra care. Growing for the sake of achieving high growth is no longer something you want to do. Cash flow is king, and investors are starting to look into startups with positive EBITDA.
Scale-up alongside your company’s financial strength. Build a runway for your startup, and then scale up while maintaining six to 12 months of financial strength. That’s how you keep the business sustainable and well-protected against unnecessary financial risks.
Manage your cash flow using the tips and tricks we reviewed in this article, and you can have a more reliable, more robust, and faster-growing startup. The market is filled with opportunities to seize, and healthy cash flow is how you maximize your presence in it.