January 25, 2013 | 5-minute read (891 words)
On the road to “cashflow positive,” there are many obstacles. I see startups sabotaging themselves all the time. By not really understanding and monitoring your cashflow, you may be inadvertently creating serious cashflow problems. And a serious cashflow problem leads to a failed business...
Work closely with a trusted financial partner and dig deep into your books to avoid these cashflow mistakes:
1. Not using a GAAP accounting system.
You need an accounting system in place that helps you keep track of money in, money out. It’s that simple. Using these standards ensures that you have reliable accounting information on which you can base important financial decisions (also necessary for potential investors and creditors). If you don’t have a system in place, you’re just flying blind.
2. Not monitoring your accounting.
Once you have an accounting system in place, you’re not totally in the clear. Now you need to track and analyze the numbers to understand and improve your cash flow. Especially keep an eye on the balance between expenses and sales. Also use the numbers to identify where the profits are coming from (i.e. is one product more profitable than others) and make business decisions based on your findings.
3. Considering yourself profitable when the money starts to flow.
Just because you’re earning some revenue, doesn’t mean you’re profitable. You need to subtract your costs from the money you’re earning—including future costs such as taxes. If there’s still money left over after your calculations, then (and only then) are you making a profit.
4. Counting your revenue before payments are collected.
The invoice may have been sent, but has the payment been received? Customers are notorious for stretching pay periods which means that the money you were including in your calculations may not exist. It’s important to have a system in place to collect payments in a timely fashion per agreed upon terms. Your receivables need to be in balance with your payments.
5. Not minding your cash obligations.
Just as you would hope (and expect) your customers to make payments in a timely fashion, you need to do likewise. Keep a close eye on bills and, again, make sure that you have a system in place to ensure that you give the money going out at least as much attention as the money coming in.
6. Underestimating the value of financial reporting.
Managing the day-to-day accounting is important, but you also need financial reports for insight into the big picture, that is, the real-time and projected status of your profitability.
7. Flying budget-free.
Operating your business without a budget is like starting a business without a business plan. You need to know where you’re going, and set up sign-posts along the way, if you want to build a profitable business. Unfortunately for those entrepreneurs who aren’t “number people,” a budget is never one and done. You’ll need to create a new budget at least annually.
Need help creating your budget? Contact Early Growth Financial Services.
8. Taking on unnecessary expenses.
Many businesses wind up spending money unnecessarily. One of the biggest unnecessary expenses is staffing costs. Entrepreneurs often miscalculate their personnel costs: who you need, what you need to pay them, and how long (and how much it will cost) to source them. Before going through the expensive process of sourcing, recruiting, and hiring an employee, look into outsourcing, especially for non-core functions such as HR, accounting, and legal.
9. Undercharging for your product/service.
Pricing is an art, a challenging art. For more information on pricing, see my previous post 6 Pricing Tips for Your product/Service. Do your due diligence to perform competitive analysis. It’s not realistic to think that you can charge much less than your competition, unless you are guaranteed a much higher volume of sales—a nearly impossible guarantee for most startups.
10. Miscalculating the time to hit a milestone.
Perhaps the biggest mistake I see has to do with milestone funding. Companies want to make sure they achieve a milestone with any money they raise. But, oftentimes, they will miscalculate the money and time necessary to achieve a given milestone. When creating your financial plan, you’ll want to make sure that your cash flow and timing are in alignment with any funds you raise.
If you’re not making money, you’re not really running a business. To have a successful business means having a profitable business, but ultimately the real goal to stay afloat is healthy cash flow. If you don’t have enough money coming in, you won’t have enough money to pay your expenses. Avoid these cashflow mistakes to ensure that your company gets—and stays—in the black.
Questions about monitoring and managing your cashflow? Let us know in comments below or contact Early Growth Financial Services for financial support.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, a financial services firm providing a complete suite of financial and accounting services to companies at every stage of the development process. He's a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.