6 Cash Flow Mistakes Start-ups Make & How To Avoid Them

Cash flow management problems are one of the top start-up killers today. It is often true that the more funding you raise, the more money you waste. Paradoxically, cash flow management problems frequently occur after investors inject a ton of cash into a start-up. Here’s why:

Entrepreneurs tend to be frugal and prudent when cash flow is running tight and monitoring is easy. Bootstrapping also forces us to think hard about their expenditure to make every cent count.

Conversely, after a huge round of funding, we tend to become complacent and have a grossly mistaken delusion that we have made it big and the future is set in stone. IT IS NOT!

So here is our advice and our fellow entrepreneurs’ experience. Some of whom learnt these cash flow management lessons the hard way so that you don’t have to repeat them. Let’s dive in.

 

Reckless spending

It is true that we should not get too caught up with micromanaging our petty cash so that we can focus on the goals that matter. However, you need your team to buy-in to the reality that a start-up has less resources than an MNC. Every cent counts. With a frugal mindset, your team should ask themselves the following questions before buying anything:

  1. Do we really need this?
  2. Do we already have this or a substitute somewhere in the office?
  3. Is this this the most cost-effective option available?

Question 3 is crucial. Please understand that “cheap” is not the same as “cost effective”. Buying a cheap printer with expensive ink cartridges and a short lifespan is NOT cost-effective. I recommend that you calculate the lifetime cost of using a product before committing to a purchase. Here is an example:

Assume we will print 1,000 pagesper year

Printer upfront cost Printer lifespan Ink cartridge cost Number of pages each cartridge can print Number of cartridges used over printer lifespan Total Cost over printer lifespan Total annual cost
Printer A $80 2 years $40 80 25 $1,080 $540
Printer B $140 5 years $35 100 50 $1,890 $378
Printer C $260 5 years $50 200 25 $1,510 $302

 

Clearly from the example, Printer C is the most cost-effective solution despite having the highest printer cost. The savings per year is actually $238! So take the effort to calculate the best option for your start-up and stretch your dollar to improve cash flow.

 

Spamming hires

I know that your investors will pressure you to maximise your company growth over revenue. You need to be very weary of that advice. What are your investors motivated by? They want your company to group 400% in valuation so that they can quickly exit within 5 years, sometimes 3 years. Right? The reason for their aggressive growth push is because only 10% of their portfolio start-ups will ever make it big, and they promise their investors that they will produce 20% in annualised returns regardless of your long term cash flow management issues.

Your investors’ motivations will seldom coincide with yours, even if they were former entrepreneurs themselves. So, be wise about how you handle investor-relations. Bear this in mind: Don’t hire hastily. Hire right, not hire fast.

What’s more if you want to scale up, automating processes instead of getting more hires will be a much better long-term solution. So keep your team lean with some of the following tips.

  • Automate lead generation with TQ Prospector which enables you to consistently get high quality leads from Google directly
  • Automate sales follow-ups and account management with CRM software
  • Automate financial accounting and budgeting with accounting software such as Xero which integrates with your bank account and minimises manual transaction logging and checking

 

Stockpiling inventory because you believe you will increase sales

It is true that producing inventory in bulk will produce some cost savings because economies-of-scale. However, what this means that you are locking up your cash in illiquid assets and not being able to do anything else with it. After all, your inventory has a shelf life with depreciating value over time. They may expire, rust or get damaged.

Furthermore, you are paying for storage. Depending on the nature of your inventory, sterile rooms, dehumidifiers and chillers do not come cheap. Stockpiling of inventory is one of the most expensive mistakes you can make.

It is really not worthwhile to make some small savings in bulk orders and forego all other business opportunities with your cash. Protect your cash flow. Don’t stockpile on hope. Stay realistic.

 

Paying bills on time

This advice may sound odd at first, after all it’s cash out of the coffers. Shouldn’t we delay payment as long as possible?

While some companies do that, it is ultimately toxic for supplier relationships in the long run and opens up the possibility of being charged interest. Hence, it is always ideal to pay on-time, neither early or late.

Of course, the better your negotiating position, the more you should try to get better terms of payment with an extension of your payment due date.

 

Offering credit to non-creditworthy clients

Repeat after me: DUE DILIGENCE. Bear in mind that however huge or seemingly successful your clients are, they could be another Enron. Check their cash flow statements and statement of financial position. Ask yourself the following questions:

  • Can your client afford to pay you?
  • What is their credit rating?
  • What is their repayment history?

If you suspect that your client is probably unable to pay you, don’t drag the repayment date. Collect what they can pay and be prepared to record a bad debt expense. It’s painful, but it is better to realise small losses early than to realise huge losses later. Don’t gamble with your cashflow.

In the worst case, you might even wish to reconsider taking on the project in the first place. Yes, it looks good as clocked revenue – but revenue that you can never collect on but have to spend your resources to make the project work? That’s throwing good money after bad…

 

Neglecting your Accounts Receivable

Don’t be a loan shark, but also don’t be a charity. The longer your accounts receivable ages, the less likely you will get paid. Keep following up with your dues. The cash you don’t get back is business opportunity gone. Accept partial payments. If you don’t mind accepting a small percentage loss of the accounts receivable, you can consider factoring.

Factoring means selling your accounts receivable. You will have to pay a percentage of the accounts receivable called a factoring fee. This means of financing is popular among small businesses and it is one option you can consider to further improve your cash flow cycle.

 

Have you encountered any of these issues in your business before or have more tips on how to improve cashflow for startups? Let us know in the comments below.

 

 ThunderQuote is the most comprehensive business services portal in Singapore, Australia and ASEAN , where hundreds of thousands of dollars of procurement contracts are sourced every month by major companies like Singapore Press Holdings, National Trade Union Congress and more.

5 Reasons Why E-Procurement Makes Sense!

 

When it comes to procurement, everyone that is in the industry will tell you that it is a hard thing to handle as well as master. However, as the times have changed, the way procurement managers work with the procurement of services have also evolved alongside technology. E-procurement has been around for years now and if you ask anyone directly linked in the business, they will tell you that it’s a very daunting system that takes some time to get used to. E-procurement is not for the faint hearted and e-procurement systems can help your business immensely if you figure out the right way to get it done! 

Continue reading “5 Reasons Why E-Procurement Makes Sense!”

8 reasons to start your business in 2017

Are you an aspiring entrepreneur who has been thinking of setting up your own business but lack the courage to do so? Perhaps you already have a plan, but there’s a multitude of reasons why entrepreneurship is risky. From the lack of resources, to losing sleep, to possibly ending up in a pile of debts, the inertia to start seems pretty high.

However, there has never been a better time to start your own business than 2017. Here are some reasons to motivate you to take the first steps in starting up your own company.

 

Continue reading “8 reasons to start your business in 2017”

Spend Analysis, Part 4 (Final)

In our previous articles, we defined the concept and key activities of spend analysis using a basic business process. We revealed that the core function of spend analysis is to assign material categories which represent the supply market view to payment data incurred at the organisation level. This concluding article will help to define the material categories, and some metrics that could be adopted to manage the spend analysis program.

Continue reading “Spend Analysis, Part 4 (Final)”

Spend Analysis, Part 3

Financial Accounting View

As stated in our previous article, it is common for spend data to be extracted from accounting and financial systems. These systems are reliably maintained to provide payment data in currency units. It follows that spend data extracted from accounting systems do inherit a number of accounting terms with it, and these terms do not match Procurement’s view of the supply market. Let us use an example to illustrate the situation.

Continue reading “Spend Analysis, Part 3”

Spend Analysis, Part 1

As stated in our previous article, the importance of spend analysis to support Procurement cannot be over emphasised. At the same time, the spend analysis topic is also one of the most misunderstood among business users and Procurement alike. So the intention of this and the next few articles is to dispel some myths about spend analysis, and answer the questions that were seldom asked about the topic.

Continue reading “Spend Analysis, Part 1”

Procurement Benchmarks

aaeaaqaaaaaaaakwaaaajdc4ztk5nmy2lwfkyjitngy5mi04ztq5lwy3mjk5mtfjyzk4yw

In our previous article, we highlighted the difference of spend from expenses. While expenses stated in financial statements contain accounting entries such as depreciation and inventory write-off, spend reflects the actual money paid by an organisation to external parties, regardless of whether they are used to pay for services, products or assets. In this article, we leave the detailed definition of spend and analysis methods behind for a while, and start to look at the key performance metrics that are relevant to Procurement.

Continue reading “Procurement Benchmarks”

Are Aggressive Price Negotiations With Vendors Damaging Company Profits?

 

business-vendors

When you run your own business, you definitely understand the value of the money you’ve put into the business. Owning a business or a start-up company is a huge responsibility and every decision you make will definitely have a domino effect on the business as a whole. As a corporate employee, you also have a duty to your company to ensure that you get the best deal for the company.

One of the most important decisions is to negotiate prices with your vendors to ensure a good inflow of services that your company needs. This decision making should be taken seriously and it’s good to always have someone else help you with these decisions. This article by ThunderQuote seeks to help with that.

Continue reading “Are Aggressive Price Negotiations With Vendors Damaging Company Profits?”