In the unpredictable world of startups, maintaining a cash surplus can be a lifesaver. It provides a safety net in case sales don’t meet expectations or unexpected expenses arise. A healthy cash reserve can also improve your startup’s creditworthiness, making it easier to secure financing when needed. Aside from providing security, surplus cash also paves the way for expansion opportunities, handling large bills, or purchasing essential equipment. While injecting personal capital or taking out a loan can aid in creating a cash surplus, let’s explore some other effective strategies for improving cash flow in your startup.

Streamlining operations

Before dipping into external funds, consider if there are ways to free up cash internally. A few potential approaches include:

• Encouraging customers to make early payments by offering discounts or facilitating immediate payment options such as online or mobile payments. You can also automate invoicing processes to ensure invoices are sent out promptly and follow up on late payments using automated reminders.
• Consider selling rarely used assets and renting the equipment as needed. Leasing equipment, especially for high-tech tools that rapidly depreciate, can be a more cost-effective solution in the long run.
• Reducing personal drawings from the business during periods of slow revenue growth.

Inventory management can also tie up significant amounts of your cash. Improve your cash flow by:

• Implementing ‘just in time’ inventory practices to reduce stockpiling.
• Discontinuing slow-moving items and holding sales to clear obsolete inventory.
• Regularly reviewing inventory levels and turnover rates to ensure you’re stocking only what’s necessary. Utilize inventory management software to track stock levels and set reorder points based on sales patterns to avoid overstocking.

Credit management

Rather than letting cash be tied up in accounts receivable, consider not offering credit, or accepting credit card payments to improve cash flow. If you do offer credit, consider reducing the payment terms from 60 days to 30 days to speed up receivables. For long-term projects, consider invoicing for periodic progress payments. This ensures a steady cash flow throughout the project instead of waiting for the end to invoice. Additionally, factoring or invoice financing can help convert receivables into immediate cash if needed.

Price adjustments

A straightforward method for enhancing cash flow is price increases. Evaluate where you can increase prices without dampening demand. Before raising prices, conduct a competitive analysis to understand how much your customers are willing to pay, and ensure your product or service continues to offer perceived value.

Encouraging prepayments

Request customers to prepay or pay a deposit, especially for large contracts. Offer incentives like early-bird discounts or exclusive perks for prepaying. A consistent payment system, like monthly payments or a subscription model, can also spread out cash flow evenly. Subscription models not only ensure recurring revenue but also improve customer retention rates.

Supplier negotiations

Negotiating beneficial terms with suppliers, such as consignment or extended payment terms, can free up your cash. Consider forming strategic partnerships with key suppliers to get bulk discounts or more favorable terms in exchange for long-term commitments. If you’re in a tight spot, consider returning goods to suppliers for a credit. Building strong relationships with suppliers also makes them more likely to be flexible during difficult periods.

Operational improvements

Creating better cash flow may also involve:

• Implementing stricter credit control and debt collection procedures.
• Sourcing less expensive materials or supplies. Regularly reassess your suppliers to ensure you’re getting the best deal possible and consider switching to local suppliers to save on shipping costs.
• Identifying and curtailing rising expenses. Implementing energy-saving initiatives, like using LED lighting or optimizing your supply chain, can also contribute to lower costs.
• Focusing on high margin work and saying no to low margin projects.
• Conducting market research to identify challenges and taking appropriate action. This could include exploring new revenue streams or pivoting to address unmet customer needs in your industry.

Regular savings

Set up regular contributions into a business savings account, such as a percentage of sales every month or surplus profit each quarter. Make sure the savings won’t impact your business operations. Consider investing a portion of your savings into low-risk financial instruments like money market funds or treasury bills to generate passive income for your business.

Every business has the potential to find extra cash in different areas, if you can get creative and make some cuts where needed. . Additionally, by adopting efficient financial practices such as regularly reviewing financial statements and creating cash flow forecasts, you can identify potential issues before they escalate. And even if you still need a business loan, it might not be as much as you thought if you can find other ways to generate some cash surplus.

Uncertain about managing your startup’s finances? We are here to guide you. Contact us to schedule a consultation and let’s unlock the financial potential of your business.