Cash flow is an important factor to early stage companies. The reason is because, it allows companies to have the money required to run their operations and also use that money to grow their business. Managing your cash flow is important to young start-up and growing companies so that they do not go into a cash crisis that could stop them from continuing to develop. Maintaining and managing cash flow is important; however, being profitable is equally important. Using cash flow to manage daily expenses and to make sure that you have enough cash to grow your company will allow you to expand and grow your company without requiring outside sources of funding.

1. Track Your Cash Flow

Tracking cash flow is the first way to manage your cash flow. Tracking your cash flow means monitoring the money coming in (revenue) and the money going out (expenses) so that you can determine if you have enough cash flow to fund your expenses.

Actions to Take to Monitor Cash Flow:

• Monitor receivables – Make sure that all of your customers are paying their bills on time. If a customer has outstanding balances contact them to see why they have not paid their bill yet.
• Control Payables – When possible try to negotiate with your vendors to extend the time you have to make payments to them.
• Review your cash flow projections periodically so that you can anticipate future cash needs.

Regularly tracking your cash flow will prevent unexpected problems and will give you time to prepare for upcoming expenses.

2. Build and Maintain a Cash Reserve for Emergency Purposes

Having a cash reserve available for emergency purposes is a good way to manage your liquidity during periods of uncertainty. A cash reserve provides a financial safety net in case you need to address an expense that was not budgeted for, such as a decrease in sales or an unplanned investment.

How Much Should I Have in My Cash Reserve?

• Set a cash reserve target – Set aside enough money in your reserve to provide 3-6 months of operational funding.
• Keep your reserve in a liquid account – Use a high-yield savings account to keep your reserves easily accessible and earn interest.

Having a healthy cash reserve gives you peace of mind knowing that you can get through tough times financially.

3. Manage Your Inventory and Assets Effectively

Effectively managing your inventory and assets will help you release cash and improve your liquidity. One common mistake made by many small businesses is overstocking inventory. Overstocking creates a situation where you have tied up cash in products that you may never sell.

Ways to Manage Your Inventory:

• Use inventory forecasting tools to ensure you are carrying enough inventory to meet customer demand.
• Sell or lease underutilized assets to quickly raise some cash.

When you optimize your inventory and asset management you can free up capital and improve your liquidity.

4. Obtain Access to Flexible Funding Options

Obtaining funding to support an early stage company can be lifeblood for those companies. However, depending on funding can become expensive and put pressure on your liquidity in the long run. It is very important to find a balance in how much you rely on funding.

Options for Funding Include:

• Lines of Credit – Use a revolving line of credit to borrow and repay money as needed to support short-term liquidity requirements.
• Factoring – Factor your receivables to obtain immediate cash flow.
• Convertibles – Raise funds through convertible loans that can convert to equity in the future.

Using flexible financing options will enable you to maintain your liquidity while limiting your leverage.

Conclusion

In conclusion, effective liquidity management is vital to early stage companies to survive and grow. Managing liquidity includes regular monitoring of cash flow, maintaining a cash reserve, optimizing your inventory and assets, and obtaining access to flexible funding options. These four components will enable companies to have the liquidity to fund their operational requirements and capitalize on growth opportunities. Effective liquidity management will enable companies to remain adaptable, deal with obstacles, and achieve long-term success.