Q.What’s one cash flow tip you’d give a new entrepreneur whose business is not yet profitable?
The following answers are provided by the Young Entrepreneur Council (YEC), an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, the YEC recently launched #StartupLab, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses via live video chats, an expert content library and email lessons.
1. Spend Slowly and Steadily
There is no reason to take more financial risk than you need to when your business isn’t profitable. Allocate funds toward essential business operations that will take you to profitability first and foremost. By ensuring you’re spending only on essential operations, you can reduce the amount of debt you accumulate and thus the financial risk you take with your business.
- Fehzan Ali, Adscend Media LLC
2. Outsource to Save on Hiring Costs
You don’t want to run out of cash before you even get your startup off the ground, so you need to calculate and closely monitor your cash burn. If you’re bootstrapping, one effective way to lower your cash burn is to outsource non-core functions such as accounting, finance and HR. Outsourcing, rather than hiring, offers significant savings that help reduce your cost structure.
- David Ehrenberg, Early Growth Financial Services
3. Offer Small Discounts to Those Who Pay Early
Offer a small discount to customers who pay invoices early, and you may not only improve cash flow, but also impress your customers and ensure a long-term relationship.
- Andrew Schrage, Money Crashers Personal Finance
4. Pay Yourself
It might seem counter-intuitive, but if you are investing in your business, make sure to take some of the stress away from yourself. Paying yourself has the dual benefit of freeing up your mind space and helping you realize what the real cash-flow target of your business needs to be.
- Aaron Schwartz, Modify Watches
5. Negotiate Receivable Terms
In my first business, my net 90 terms were absolutely crushing my cash flow. After several emails with my two biggest clients, I negotiated the terms down to net 15 and net 30. If I hadn’t made this move, I’m not sure I would have been able to cash flow through the startup phase. If your business is outside the law or medical industries, realize most “industry standards” are negotiable.
- Nick Reese, Microbrand Media
6. Know Your Burn Rate
I often come across early-stage entrepreneurs who don’t know how much they are losing on a monthly basis. As a founder, you should have intimate knowledge of your finances. Specifically, you should know how many months you have until you run out of cash. Also, you should know how much you spend on research and development, sales and marketing and general and administrative costs.
- Bhavin Parikh, Magoosh Test Prep
7. Ask Customers to Pay Upfront
We require upfront payment from our customers. This keeps cash flow healthy and our receivables balance low. Most of our customers are small businesses too, and we’re transparent about our reasons for needing payments upfront. Because we’ve always delivered our product on time, our customers trust us to do what we’ve promised.
- Sarah Schupp, UniversityParent
8. Compensate in Stock
Don’t be shy to ask your employees or fellow founders to take part of their pay in stock until you can turn profitable as a team. Not only will it help with cash flow, but also it will provide them with the extra motivation to help turn profits quicker.
- Nicolas Gremion, Free-eBooks.net
9. Use a Charge Card
Many entrepreneurs don’t know about the benefits of a charge card versus a credit card. Charge cards offer much larger spending limits, though the charges can’t be financed over a long period of time. If you’re looking for a way to improve cash flow during short periods (while you wait for receivables, for example), a charge card is an excellent way to drastically increase your purchasing power.
- Brittany Hodak, ‘ZinePak
10. Collect Customer Payments First
Try to maintain a negative cash conversion cycle, in which you are collecting payments from customers before you are paying suppliers for the cost of goods sold or even marketing costs.
- David Hauser, Grasshopper
11. Negotiate Everything
12. Wait to Hire
Do not hire until you’re confident you’ve found a product-to-market fit. Hiring doesn’t make your company cool. Making money does. Once you hire, your burn rate goes up; it’s harder to achieve profitability and even harder to raise more money. Every choice you make — hiring, marketing spends, etc. — will affect when and if you become profitable.
- Sarah Ware, Markerly
Image Credit: bayareaequitygroup.com