Recently came across an article in the London Times about how to approach financing a startup or new business. Overall it’s a pretty good summary of the basic dos and don’ts. Do know what you can do without today. Negotiate with your suppliers so that you can get better terms on your payables, such as a longer payment period and/or discounts. Don’t take on an equity investor unless they bring something to the table which is absolutely crucial (other than money).
One item mentioned, which has been problematic for even my established clients has been the timely billing of customers and collection of accounts receivable. How much working capital are you financing due to large A/R balances? For most startups, poor billing and collections can be a killer combination. For all businesses, it can be quite expensive to continue to finance customers for months after a purchase. Know your accounts receivable turnover. Track it. If it is low or declines over time, find out why. Seek to improve the timing of your collections. Provide your staff with incentives for reducing your company’s days sales outstanding.
Many entrepreneurs focus on profitability (which is important) but neglect monitoring and managing their cash flow. It is important as the financial manager of a startup or smaller company to watch your cash flow like a hawk.
For more tips on how to improve cash flow, click here to access our 25 Ways to Improve Cash Flow whitepaper.