How to manage cash flow in the early stages of your start up

Your business is up and running, and it’s all starting to take off. But as any seasoned entrepreneur will tell you, keeping the money flowing is just as important as bringing it in. For start ups in their first few years, managing cash flow can be the difference between thriving and barely surviving.

With that in mind, let’s look at some practical ways to keep your finances on track as your business grows.

Understanding your cash flow

First of all, you need to know exactly when money is coming in and going out of your business. This might sound obvious, but it’s easy to lose track when you’re juggling multiple priorities and everything is moving at 100 miles per hour.

Take a good look at your income and expenses. When do you typically get paid for your products or services? When are your bills due? Understanding the cycle helps you plan ahead and manage cash flow better, avoiding those potentially stressful moments when bills are due but payments haven’t arrived yet.

Strategies for smoother cash flow

Now that you’ve got an idea of how to get a handle on your cash flow cycle, let’s look at some strategies to keep things running smoothly.

Invoice promptly and chase payments

Send out your invoices as soon as the job is done. The quicker you invoice, the sooner you’re likely to get paid. It might feel awkward, but don’t be shy about chasing late payments. A polite but firm reminder often does the trick.

Consider offering small discounts for early payment. It might seem counterintuitive to offer discounts when cash is tight, but getting paid a bit less now is often better than waiting longer for full payment.

Negotiate with suppliers

You might feel you don’t have much clout with suppliers as a newer business, but it’s worth trying to negotiate better payment terms. Even extending your payment period by 15 or 30 days can make a big difference to your cash flow. Be upfront about your situation. Many suppliers are willing to work with you—after all, they want your business to succeed too. It means a long-term customer for them.

Build a cash reserve

Building a cash reserve is easier said than done. But having a buffer can be helpful when unexpected costs crop up or payments are delayed. Try to set aside a small percentage of your revenue each month. And don’t think of this reserve just for emergencies. It can also help you take advantage of opportunities, like bulk-buying discounts from suppliers or investing in new equipment to grow your business.

Consider flexible financing options

Sometimes, despite your best efforts, you’ll face cash flow gaps. This is where flexible financing can make a real difference. Options like revolving credit facilities allow you to borrow only what you need, when you need it.

For example, you might use a flexible line of credit like FlexiPay from Funding Circle, to bridge the gap between completing a big order and receiving payment, or to stock up for a busy period without depleting your cash reserves.

These types of facilities often come with competitive rates, and with FlexiPay you don’t pay interest. Instead, you’re charged a fee per transaction to keep everything more transparent and straightforward. 

Look at more traditional financing options

While flexible options like revolving credit can be great for day-to-day cash flow management, don’t overlook more traditional financing routes. Business loans can provide a lump sum to invest in growth or cover larger expenses.

For example, Funding Circle offers business loans from £10,000 to £500,000 with repayment terms up to 6 years. These can be ideal if you need a significant amount for a specific purpose, like expanding your premises or investing in new equipment.

Also, keep an eye out for Government-backed schemes. These often offer favourable terms to help small businesses grow. The Growth Guarantee Scheme (GGS) is one such initiative, available through Funding Circle. It’s designed to support UK businesses as they grow. Through GGS, you can borrow between £25,001 and £2 million, with the Government providing a guarantee to lenders.

Use technology to your advantage

There are plenty of tools out there designed to help small businesses manage their finances. From accounting software that sends automatic payment reminders to cash flow forecasting apps, technology can take a lot of the headache out of financial management.

Look for solutions that integrate with your existing systems and provide real-time insights into your financial position. Many of these tools are affordable and can save your startups hours of manual work each week.

Plan for growth

As your business grows, so will your cash flow needs. It’s important to think ahead and plan for increased costs that come with expansion.

Will you need to hire more staff? Invest in new equipment? Move to larger premises? Factor these potential costs into your cash flow projections. It’s better to be prepared than to be caught off guard by the financial demands of success.

Consider creating different scenarios—best case, worst case, and most likely. Doing so can help you prepare for various outcomes and adjust your strategies accordingly.

Diversify your revenue streams

Relying on a single product or service for your start up can leave you vulnerable to cash flow problems if demand dips. Look for ways to diversify your range, be it introducing complementary products, targeting new customer segments or even exploring seasonal variations of your core business.

A mix of revenue streams can help smooth out the ups and downs in your cash flow. It might take some experimentation to find what works, but it can pay off in more stable finances in the long run.

The importance of regular review

Make reviewing your cash flow a regular habit. Set aside time each week to look at your financials, track your progress and adjust your strategies as needed.

As your business evolves, so will your cash flow patterns. Stay on top of these changes and be ready to adapt your approach. That might be exploring new financing options, such as getting a business credit card that offers cashback. What worked for you in year two might not be the best strategy in year five.

Getting help when you need it

You don’t have to figure all this out on your own. There are plenty of resources available to help small businesses manage their finances. Many lenders offer insights and tips to help you make the right choices for your business. Don’t be afraid to ask questions and seek advice.

You might also consider joining a local business network or finding a mentor who’s been through the start up journey before. Their experience and insights can be invaluable as you navigate the financial challenges of growing your business.

Managing your cashflow

Managing cash flow in the early stages of your business isn’t always easy, but it’s a skill that pays dividends. With careful planning, smart strategies, and the right tools, you can keep your finances on track, giving your start up the stability it needs to grow and thrive. Every successful business started where you are now. Keep at it, stay focused, and don’t be afraid to seek help when you need it. 

Learn more about financing for start ups and potential solutions from Funding Circle.

08/10/24: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.