10 Common Cash Flow Issues New Startups Face (And How To Avoid Them) by Forbes – Entrepreneurs

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Not every business owner is a finance guru with experience handling money. For entrepreneurs with new startups, it can be challenging to manage cash flow, especially when predictions are based on quarterly estimates rather than a previous year’s hard data.

If you feel like you’re struggling with cash flow as an early-stage business owner, know that you’re not alone in this struggle. To help you overcome some common financial issues, we asked a group of Young Entrepreneur Council members to describe some cash flow problems new startups often face and how to avoid them. Here’s what they had to say.

Members of Young Entrepreneur Council discuss how to avoid cash-flow issues new businesses often face.

All photos courtesy of YEC members.

1. Bookkeeping Errors

If your bookkeeping isn’t in check, you’re going to have tons of problems down the road. It will be a huge weight of stress on your shoulders when you can’t figure out where you went wrong and why the numbers aren’t adding up. Too many startups don’t have an organized bookkeeping system and it ends up haunting them down the road. If you aren’t good with finances or simply don’t have the time to do the bookkeeping, hire someone to do it for you. They’re professionals at what they do and will ensure that you get the money you’re owed while knowing exactly what’s going on with it. – Jared Atchison, WPForms

2. Overspending

Overspending on lunches for business meetings, software, office equipment, advertising and more is really easy if you’re flying by the seat of your pants. So you need to watch out for overspending. First, you need to sit down and decide what expenses are absolutely necessary for your startup. For instance, you might be paying monthly for communication software that you don’t really need. Decide what you truly need to run your business at its best and cut out the rest. Cutting down on costs will allow you to save a ton of money on unimportant items and grow your business quicker. You should also create a budget going forward. Decide what amount you can spend annually on your needs and stick to it. – Stephanie Wells, Formidable Forms

3. Lack Of Financial Goals

Too many startups fail because they spend a lot at the beginning of the venture and end up with nothing before they’ve even hit a milestone. That’s why you need to carefully estimate how much you believe your startup will spend. Even if it’s a rough estimate because you have very little data to go off of, it’s better than having nothing to review. Remember that your budget is a serious aspect of your business and you need to budget your finances as best as you can before you run out of money completely. Set realistic financial goals that you and your team can follow. If it’s too tight a budget, you already know you’ll overspend. If it’s too much, you’re given more leeway than you need and will end up spending on unnecessary things. Set goals and stick to them. – Chris Christoff, MonsterInsights

4. Giving Up Too Much Equity

Many new startups get excited when they find out that investors want to get involved with their business. You have to make sure that you think carefully about the investors you take on and how much of your equity you’re willing to give up. Far too many business owners decide to bet high and take on a whole bunch of investors at once so they have the money to keep the business operational. However, when this happens the business owner may give up a ton of unnecessary equity. Take it slow and know how much you think you’re going to need before you start talking to investors and giving up your equity. – Syed Balkhi, WPBeginner

5. Expecting Immediate Results

The biggest problem I’ve heard from friends and associates who have just started their own startups is that they planned on generating a profit sooner rather than later. The unfortunate truth of creating a startup is that you will have to spend a significant amount of money with little to no return until much later in its lifespan. Therefore, I advise people with new startups to run their operations in as lean a manner as possible, incrementally adding new features and team members with time. – Bryce Welker, Crush The CPA Exam

6. High Overhead Costs

A common problem for startup businesses is high fixed costs and overhead. Many entrepreneurs expect a high volume of sales and feel it necessary to build an infrastructure to support their rosy forecasts. Keep your fixed costs at a minimum to reduce overhead and keep more cash on hand. Without underlying data to support the forecasts, you can run out of liquidity very quickly. If business demands increase you can always add new equipment, employees and make other capital investments as needed. You don’t have to unnecessarily burden yourself with high fixed costs until the revenue supports the growth. – Matthew Podolsky, Florida Law Advisers, P.A.

7. Too Much Payroll Spend

When a company is starting up, they don’t know how much they will need for certain expenses, such as payroll, office expenses, technology or employee errors. In terms of payroll costs, if they hire twice as many people as they think they were going to, they may find it hard to make payroll. Plan ahead and make sure you are constantly managing cash and being as realistic as possible with how much your payroll is going to be. Also, because new companies may be paying down debt and paying higher-than-ideal interest, they need to make that much more money each month in order to break even. – Jennifer A Barnes, Optima Office, LLC

8. Not Having A Line Of Credit For Spending Flexibility

Stay flexible and don’t fall into the trap of thinking that the next quarter will be like the current one. You may find yourself saying, “Well, next quarter will be better because we won’t have that big one-time expense,” but this sets you up for a fall. Do your best to get a line of credit early on in your business life so you have the flexibility to handle cash-flow fluctuations. Start with small regional banks—they’re more likely to help a young business than their big, national counterparts. – Vik Patel, Future Hosting

9. Not Getting Payment Up Front

During the startup phase, most business owners are desperate to bring in clients. In fact, most become so frantic about not having enough steady clients that they’re willing to provide products or services without even asking for payment up front. Closing a deal with a client because you promised they wouldn’t need to pay anything until services or products have been delivered can cause more problems. One such difficulty would be collecting the payment after work was done or the product was shipped. If your clients do not pay up, you’ll be stuck in a financial situation that’s even worse than when you were starting out. Make sure to protect your cash flow by always asking for payment up front or at least a security deposit that can cover losses just in case. – Kyle Goguen, Pawstruck

10. Not Reviewing And Adjusting Your Monthly Forecasts

If this is your first startup, there is a good chance you’ll spend twice as much and sell half as much as your model projects. This is okay! The key is to acknowledge this quickly and incorporate monthly financial reviews. We do a monthly forecasting meeting that includes stakeholders from various departments, not just finance. This helps us have more accuracy and also creates a culture in which everyone feels vested in the financials. We do a monthly forecast on the first day, a check-in on the 15th and a third meeting on the last day of the month for reviewing actuals. We then compare the forecast on the first of the month with the actuals and calculate variances. This helps us hold each other accountable and improves our accuracy. – Brian Samson, True North

May 30, 2019 at 08:21AM
https://www.forbes.com/sites/theyec/2019/05/30/10-common-cash-flow-issues-new-startups-face-and-how-to-avoid-them/
Forbes – Entrepreneurs
http://www.forbes.com/entrepreneurs/
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