In the energetic environment of startups, poor cash flow management is a challenging hurdle that can hinder growth. The early excitement of starting a new venture often overshadows the careful financial preparation. But the path from start to sustained growth is quite challenging and startups often find themselves stumbling over handling their cash flow.
Let’s understand why startups struggle with cash flow –
- Over-ambitious revenue forecast:
Sometimes founders expect more revenue from their startups than their actual potential. They are unaware of the obstacles in the market. This optimistic mindset causes major disappointment if the anticipated income is not received. In the early stages of Oyo Rooms and WeWork India faced challenges due to over-ambitious revenue forecasts and to resolve this issue, they conducted appropriate market research through surveys and customer feedback to estimate well-aimed revenue. - Underestimating expenses:
Expenses might go up more than expected in the beginning. Unforeseen delays may occur which causes financial difficulties for the startups. One notable example of underestimating expenses is the Indian startup Snapdeal. The e-commerce platform faced challenges as it initially underestimated the competition and the capital required to sustain in the market.
Make a detailed plan covering all the expenses and also strategies on how to reduce expenses. - Delayed Payments:
Not every customer pays right away, and this can create a problem for startups. The gap between doing the work or selling a product and getting paid can be a real headache. It messes up even the most careful plans and can make it tough to do important things for the business. As a leading e-commerce platform, Flipkart dealt with delayed payments from vendors and suppliers, impacting its working capital. Hence, it is advisable for startups to maintain cash reserves to overcome these types of issues. - Lack of Financial Planning:
Careful financial planning is an essential stage for startups to work on. Startups are prone to unforeseen changes which affect their well-established budget and cash flow. Establish a dynamic financial plan that incorporates flexibility to adapt to unforeseen changes.
Consequences
- Operational difficulties:
Without sufficient funds, it becomes difficult for startups to carry out even basic operations like payroll, marketing, inventory management, etc. - Loss of investor confidence:
Investors’ trust is weakened by failed financial obligations, making it difficult to secure additional investments. - Debt:
In order to survive, startups borrow costly loans which results in a heavy debt load that restricts growth and sustainability.
Strategies to overcome:
- Implementing Invoicing System:
Setting up an effective invoicing system provides quick billing and accelerates the payment collecting procedure. Our finance toolkit is available to simplify the invoices process and for effortless payments contributing to enhance financial efficiency for business. - Negotiating Favorable Payments:
Having good communication with suppliers and clients to work out terms for business that will help to maintain the cash flow. - Cash Flow Forecasting:
By using cash flow forecasting tools, startups can foresee their future financial requirements and make well-informed decisions. - Maintaining Cash Reserve:
Creating cash reserves for unforeseen expenses lessens the impact of financial difficulties and serves as safety during hard times.
In conclusion, poor cash flow management could be a major obstacle to business operations, but this problem can be solved with planning and proactive approaches. Startups may prepare themselves for long-term financial stability and growth by putting in place effective invoicing systems, negotiating advantageous payment terms, using cash flow forecasting tools, reducing costs, and setting up cash reserves.
References:
https://www.linkedin.com/advice/0/what-some-red-flags-warning-signs-poor-cash
https://www.ordermentum.com/blog/the-top-causes-of-poor-cash-flow-and-how-to-fix-them
https://www.investopedia.com/articles/personal-finance/061215/10-ways-improve-cash-flow.asp
https://www.thebalancemoney.com/cash-flow-management-2947138
https://www.mineraltree.com/blog/cash-flow-management/
https://escalon.services/blog/why-companies-experience-cash-flow-problems/
