The majority of startups eventually go through this stage and the earlier you face it the stronger you become in the future, unless of course it completely puts you off the business. So, in order to avoid strong negative impact, it’s better to prevent this stage, or at least be prepared and know how to handle it.
But first, what are the key causes of the cashflow crisis? It occurs when your expenses suddenly exceed your income. To prevent this, the best thing is to charge your customers upfront wherever possible. However, if you need to charge them in installments, it is best to create a payment plan with the higher installments due first. However, in reality that may not always be possible. Therefore, your best option vis-a-vis income is to balance the range of payments, ensuring that you have consistent and regular revenue.
As for expenses — be realistic. There is always a temptation to hire the most expensive suppliers and subcontractors mistaking them for the best quality. But quality doesn’t always equal a high price tag. Go for the highest quality your business can afford without going into debt before your business is even off the ground. Before committing to any service or purchase, check your bank account and make sure you can afford it, bearing in mind what your other expenses and revenue will be in the near future.
If you suddenly face the reality that you don’t have enough cash to pay your costs, try to talk to your suppliers. You may be surprised to find that it helps. Some may agree to postpone the payment with or even without any penalty. Another option could be to re-negotiate the terms of your agreement with a view to reducing costs, e.g. by reducing the level of service. A third possibility is to request to pay your balance in installments.
In case none of the above options work for you, you could consider invoice financing. There are cases in which invoice funders will support startups with a strong traction but in most cases this will be your option after trading for a minimum of two to three years and having at least a couple of filed accounts.
The same applies to business loans but be aware that securing any of these funding streams is subject to qualifying and may take some time. Hence, check your eligibility and be proactive and apply before it’s too late.
Finally, don’t rush to pay your bills ahead of deadlines but do try to get paid on time or in advance. Settling bills too early is unnecessary and moreover, there are often unforeseen expenses coming up. At the same time, not all customers will pay due deadlines, meaning that your balance of funds can struggle. Hence, having a pool of money you can manage is always a safer bet than to suddenly end up with no money whatsoever. This not only will give you some confidence but will also help you to settle the bills you can’t negotiate. It will also help you to have a positive balance on your account, which is always desirable should you wish to apply for a loan.
Looking for an external injection of cash into your business? Why not join us for our March 20th, Funders and Founders Networking Reception happening at WeWork Paddington from 6 to 8:30pm, learn more here.