When the average person thinks “startup,” they usually picture Patagonia half-zips, meetings with investors at Brazilian steakhouses, and button activated espresso machines. Nobody pictures the less glamorous side of slowly figuring out how to run and optimize your business. One crucial component of any business is managing cash collections – after all, no business can run without cash.
Most startups sustain themselves on accrual accounting – meaning they “count” revenue when it is theoretically earned, instead of when a physical payment is actually made. This can prove disastrous if a startup bills a customer at the end of the year or month for the services provided, and the customer pays late or doesn’t pay at all. All of a sudden you have less money than you were accounting for.
To maintain an adequate collection system use these four tips:
Bill when services are provided
You need to ask customers to pay the moment you deliver your service, and only accept ACH or credit cards as payment. This way there is no delay in payments or uncertainty. You can also encourage pre-payment by offering an annual membership at a discount, or discounts for buying in bulk. Collecting money at the time of delivery means that you can expertly manage your cash flow.
Limit Free Trials
Startups are well known for offering free trials to attract customers. This model is based on the belief that these losses with be recouped over time once the product takes off. The problem with this is that this time frame can drag on for years on end. Don’t play games with your cash flow. To combat this, demand a payback period of a year or less, and use auto renewal contracts as a means of securing additional funding.
Understand where your money is going, and what each dollar spent gets you
You need to have a clear budget and accountability. If you aren’t avidly following all of your spending you will almost definitely go over budget. You need to do diligent research whenever you are planning on spending money. All too often – that grand idea with the $5,000 price tag doesn’t pan out and you’re left twiddling your thumbs. Know how much money you can spend, and have a good idea about the value that it will bring your company.
Manage your inventory optimally
Economic order quantity models are the name of the game. You can find a template for most businesses. These will help prevent inventory sitting idle because of overstocking or choosing bad transport methods. Another option, is you can acquire inventory financing from banks. This will allow you to keep your cash flow free for use in other areas.
Many small companies don’t do the little things in the beginning that ensure success in the long run. When money starts pouring in, its easy to assume the stream will be constant. Use these four techniques to help ensure that your company doesn’t go under just because of poor management.
