5 Tips for Managing Cash Flow for Start-up Businesses

Managing cash flow for start-up businesses isn't the first topic a new business owner will discuss.

They have an idea on how much money they will make. They have a great product, a new service, or they've purchased a franchise operation. They open a bank account. They know they need to keep receipts.

The receipts get stuffed in envelopes and that's how cash flow is managed. They dismiss concerns saying they're a start-up and it will work out.

The envelope gets lost. Then receipts get stuffed in shoe boxes. The business owner is too busy getting new customers or promoting the company to pay attention to daily cash flow. That's why credit cards exist. Charge. Interest starts accruing. Some money comes in.

I've lived through scenarios like that and I've seen others live through scenarios like that, too. Managing cash flow is at the heart of business operations for start-up businesses, growing companies, major corporations, and even the federal government.

Here are five tips on managing cash flow I've decided to share.

1 Know how much money is needed to operate the business

List all the start-up costs including city business license, insurance and know how much it will cost to make the first sale.

What are the costs involved in making a sale: How many chamber of commerce mixers do you need to attend – probably 5 to 7 – to start collecting the right business cards; the cost of emailing enewsletters; driving to the first appointments; paying for store signage to attract the walk-in customers.

2 Customers pay a deposit before starting a project. No exceptions.

When I was starting a small company that did Web design we had people with great ideas approach us with how their idea was going to make money. They were willing to have us as partners if we designed the site and they would generously let us share in the profits.

We spent hours listening to these great ideas. But they didn’t have any money to pay for a deposit on the project. Uh, sorry. No deposit, no work. No exceptions. Cash flow is the lifeblood of a business it’s said – don’t let people suck the blood out of your small amount of operating capital.

3 Get a good record keeping system. It’s worth the cost.

Get hard copy receipts of all expenses, copy them or keep them in a file.

Get an accounting software program – Peachtree, Quickbooks, an expert who knows Excel.

Each day or week, enter the receipts in to the accounting software program, print out a report and review it to see the major expenses. An accountant in Glendale, California, Jackie David, says, "spend 30 minutes a week organizing your business finances. It will reduce the stress of filing taxes." She's also helped small business owners get their financial books in order starting with pencil and paper. "Getting something organized is better than nothing. And then I'll help set up their finances using an accounting system that matches their personality."

Jackie David is a certified Quickbooks Pro Advisor.

4 Know dates for money coming in and money going out. Look at a calendar and begin projecting when the initial cash will flow in to the company. Then know the due dates for all bills – phone bills, electric, trash, rent, memberships. Pay the bills closer to the due date but do not pay late. Avoid late fees at all costs.

5 Keep inventory low.

Here’s a good example of keeping inventory low.

Softline Home Fashions of Gardena, California managed cash flow in their first three years by having almost no inventory. Suppliers of fabrics from China and Indonesia sent them samples which they showed to retail outlets. The retail outlets then ordered samples in certain quantities. They contacted the suppliers who shipped the products and then turned around and paid the suppliers.

They always paid their suppliers.

Now here’s a bad example of keeping inventory low.

A start-up company had quality dishes to sell to restaurants. They made an initial sale and got good reviews. Soon, they felt the money was going to start coming in. Then they started spending money: they paid for a full Web site; they bought a van; they leased a warehouse; and they filled it with thousands of dollars worth of dishes.

And they couldn’t make sales. End of story. End of business.

Managing cash flow for a small business means understanding the concept that money is spent in the start-up phase and the owners may incur debt from personal money or loans. Then more money is needed to acquire customers – even if that money is $ 10 for a mixer here, or $15 for a lunch there.

The first months mean the cash is flowing out. But then the projects come in. Cash starts coming in to pay off start-up costs and bills.

The challenge for the owner of a start-up company is to know when the cash flow coming in will be greater than the cash flow going out. And that is the test of effective cash flow management for start up businesses.