Introduction

For startups, cash really is king. Without enough capital, startups cannot maintain or scale operations.

Cash flow mismanagement is the top reason startups fail. According to the U.S. Chamber of Commerce, 82% of small businesses fail because of cash flow issues, ranging from poor budgets to short runways to a lack of investment funding.

For early-stage startups, these risks become greater, as it’s a huge challenge to fundraise with little, if any, revenue. But it’s still possible for early-stage startups to overcome cash flow issues—all it takes is a strong understanding of cash flow management strategies to keep money coming in and limit money going out.

If you’re ready to get on top of your startup finances, review this guide for tips, tools, and strategies for early-stage startup cash flow management.

What is cash flow management?

Cash flow management is overseeing or tracking the incoming and outgoing money in a business. Cash flow may either be positive or negative.

• Positive cash flow: A positive cash flow means more money is coming into the business than leaving the business.
• Negative cash flow: This metric reveals that more money is leaving the business than entering it.

Revenue and investor funding can bring money into the business, and startups can achieve positive cash flow by limiting expenses not to exceed incoming capital. However, suppose a startup spends more money on operations, offices, hiring, and other factors without first securing more funding or earning more revenue. In that case, it may find itself in a state of negative cash flow.

Why is cash flow management important?

Startups have a runway, or the amount of time that their existing money will allow them to operate before they go broke. By managing their cash flow well, startups can make the most of their runway and operate until they reach the next round of funding or a new revenue milestone. With cash flow mismanagement, startups risk running out of money and going out of business.

“Your number one responsibility as a founder is to not run out of cash,” Jeff Erickson, head of strategic partnerships at Forecastr, told HubSpot for Startups. “One of the biggest mistakes you see founders make is not being on top of it.”

According to a PYMNTS report, around 60% of small businesses struggle with managing their cash flow. Even when a company keeps a lean budget, delayed payments from clients or vendors, unexpected expenses, and even dated financial tools can lead to negative cash flow.

While profitability is important, even a startup that’s bringing in revenue and has good traction can experience negative cash flow without keeping spending in check and being diligent about on-time payments. That’s why early-stage startups must have their thumb on the pulse of their cash flows.

Tips for managing cash flow as an early-stage startup

Managing cash flow as an early-stage startup will set a strong foundation for future success. From pitching to investors to scaling the startup, keeping a positive cash flow can pay off again and again. Here’s how to better manage your startup’s cash flow.

Keep a lean budget

A budget is a tally of expected or estimated incoming and outgoing finances for a set period, such as per month, quarter, or year. In order to manage cash flow as an early-stage startup, you need to keep a budget that restricts outgoing cash, or business expenses, to a minimum.

By keeping a lean budget, a startup reduces its outgoing money, which helps increase its chances of a positive cash flow. Startups can thin out their budget by removing unnecessary expenses or saving them for later, adopting free resources over paid versions when possible, negotiating costs with vendors, and establishing strict limits on fluctuating expenses.

Stay up-to-date with bookkeeping

Startup founders need to keep up with bookkeeping, or tracking financial transactions, if they want to manage their cash flow well. This process keeps them in tune with how the business spends money and how much money comes into the startup. 

[video: https://www.youtube.com/watch?v=LBC16jhiwak&t=4s]

Plus, good bookkeeping practices will take the sting and surprise out of tax time by informing startups of how much money is incoming. Not only that, but good bookkeeping practices help prepare startups to answer financial questions from potential investors.

Set spending rules

As part of a lean budget, early-stage startups should consider establishing spending rules to define what they will buy now and what they will wait to purchase. This process can also include setting spending limits on fluctuating costs, such as advertising or travel. 

For instance, early-stage startups may start considering where to set up an office. Set spending rules for how much to allocate toward rent, office furniture, and supplies, and limit how much money goes toward fun extras or perks.

“I think it's important to have a great culture, and you should have that budgeted in on what keeps people happy and motivated and excited to be part of your team,” Erickson explained. “But that doesn't always have to be super expensive. I have seen startups make the mistake of spending way too much on employee perks or things that are a little bit probably out-of-the-norm for their stage of a company. Hopefully, the incentive for your employees is that we're going to build something really great together. And it's not because they're not joining your team because they have the nicest place to work in the world or some of those types of perks.”

Prioritize high-return investments

When establishing your spending rules within the lean budget, remember that sometimes you have to spend money to make money. However, when you do need to spend money, prioritize expenses that will bring better returns. 

For example, you may consider paying for high-quality accounting or bookkeeping software or services, knowing that this could help reduce spending and save you money in the long term. While you may not need a fancy office building with top-of-the-line furniture right away, it may be wise to invest in a warehouse and manufacturing equipment to increase production and meet rising consumer demand.

Take advantage of free and freemium versions of tools

Startups worried about cash flow probably shouldn’t jump into paying premium rates on flashy financial tools and services. However, these tools are still important to have on hand for operating the startup and managing cash flow. 

Whenever possible, use free business tools or freemium versions that you can pay to upgrade when revenue increases or the business scales. These free tools can contribute further to the lean budget by reducing operating costs.

Offer incentives for early and upfront payments

Delayed payments from customers can put startups in a bind, especially early-stage startups that have a shorter runway between investment rounds. By offering customers incentives to pay early and/or upfront, startups can increase cash on hand early on and reduce time spent chasing down payments. For example, you could offer a small discount for customers who pay for a year of accessing your product compared to the price of paying month-to-month.

Budget for ‘unexpected’ expenses

When it comes to running a business, any number of “surprise” expenses can pop up, from a higher-than-expected tax bill to the cost of legal aid when establishing new hire contracts.

Erickson recommended budgeting for professional fees, such as for legal and financial assistance, to avoid much higher fees in the future.

“I have seen a lot of startups make the mistake of saying, ‘We can't afford $500 to $1K an hour for a great attorney, so we're going to just do it on our own and not incur those expenses,’” Erickson said. “That can be a really costly mistake down the road. It's something I think founders should budget.”

Consider fractional hiring

Whether you’re budgeting for ‘unexpected’ legal and financial services or looking for help with marketing, consider fractional hiring to reduce overhead costs until you have more money to hire full-time roles. You can hire part-time employees or even contractors in legal, accounting, bookkeeping, marketing, public relations, graphic design, and other industries to pay for services as you need them rather than investing in full-time employment when money is tight.

Establish a cash flow statement

A cash flow statement is one of the most important things you can do if you want to manage your startup’s cash flow. More than just a budget sheet, the cash flow statement gives you exact numbers for incoming and outgoing expenses over a shorter period, typically about one month. 

Founders should update and review the cash flow statement at least once a month to monitor the company's cash flow health.

The cash flow statement can help with cash flow management and better inform financial forecasts and company goals.

“One of the biggest things is having a cash flow statement so that you have that in your projections,” Erickson explained. “That way, you can project that out and say, ‘Okay, what happens if our churn rate is 3% a month instead of 2%? How big of an impact on our cash does that make? Does that mean that we have to raise more capital sooner? How does that kind of play out?’”

Start off on the right track by creating financial projections using our free template.

Use flexible forecasting

While exact numbers in the cash flow statement are important, financial forecasting is also helpful in determining what the cash flow could look like in the future. Forecasting allows startups to better predict incoming revenue and funding alongside potential expenses, including those ‘unexpected’ expenses for which startups should prepare.

KPIs to track for cash flow management

Now that you have some strategies for reducing startup spending and increasing the amount of money coming into the business, it’s time to familiarize yourself with the following key performance indicators (KPIs). 

Like important vital signs of the business, these KPIs give a clearer view of the health of your cash flow.

Operating cash flow

The operating cash flow reveals how much money the startup makes through general, day-to-day operations, but it doesn’t include money from investments. This KPI can give insight into how much the business makes from sales compared to how much it spends on daily operations. To calculate OCF, subtract operating expenses from total revenue but do not include investments or interest.

Working capital

Working capital measures the company’s cash and other assets to its liabilities. This metric can determine a company’s ability to meet certain short-term obligations, such as paying back debt. A high working capital is usually a good sign, showing that the company has enough assets to grow. A low or negative working capital means the company may be short on cash or other assets that could convert to cash to pay for liabilities within the year.

Burn rate

Burn rate refers to how quickly a company spends money. For startups, the burn rate also refers to how quickly the company spends investment funding. While founders are means to spend investment funding and cash to scale a startup, spending this money too quickly could be a sign of overspending and a negative cash flow.

Customer acquisition cost

Customer acquisition cost is the amount a company spends to attract a new customer. Knowing what it will cost the startup to expand its user base is important when it comes time to scale.

When reviewing CAC and customer lifetime value, consider the ratio between how much it costs to acquire a new customer and how much that customer will spend during their entire relationship with the startup. Ultimately, a good target is a 3:1 ratio, where the startup makes about three times more in value than it spends to acquire a customer.

Customer lifetime value

The customer lifetime value, or CLV, refers to how much money a customer generates during their patronage of your company. This number is important because retaining existing customers can cost startups less than acquiring new ones.

Loyalty pays off—Forbes reported that startups spend an average of five to seven times more to attract a new client than retaining an existing client. More money from existing customers can benefit cash flow, especially when clients pay in advance.

“Your customer acquisition cost or your lifetime value of customers, those types of things are really relevant to your cash flow because those are the things that if you make small tweaks to that or your churn, you can see in a financial model how that impacts your cash,” Erickson said. “If you miss some of those marks, you'll see that revenue decreases. Your expenses are pretty easy to project; typically, they'll stay fairly constant. But if you can't hit those revenue numbers, that's where a lot of the KPIs for early-stage companies really matter a ton.”

Days sales outstanding

Days sales outstanding (DSO) is the time it takes a customer to pay for a product or service from your startup after receiving the invoice.

According to FreshBooks, common payment terms include 14, 30, 60, or 90 days. However, for a young startup with only 3 to 18 months of runway, longer payment terms can increase the risk of negative cash flow. Consult the DSO to determine the best payment terms for your business, and consider offering early and upfront payment perks to shorten the time between invoice and payment.

Days payable outstanding 

On the other hand, days payable outstanding refers to how long it takes your startup to pay its vendors and suppliers after receiving an invoice. You can compare how long it takes customers to pay you with how long it takes your startup to pay creditors. Consider negotiating longer payment terms with vendors and suppliers as needed or negotiate lower payment costs for earlier payments to improve cash flow. 

Current ratio or liquidity

Similar to working capital, the current ratio compares a company’s assets and liabilities to determine its ability to pay back short-term obligations. It is calculated by dividing current assets by current liabilities. According to Stripe, a good current ratio is between 1.5 and 2, although healthy current ratios will vary by business and industry.

Tools for managing cash flow as an early-stage startup

Startup founders have limited time to spend on managing cash flow day in and day out, which is where digital tools and even AI can come into play. These tools help startups automatically manage cash flow through accounting, budgeting, financial forecasting, and more.

QuickBooks

QuickBooks is one of the best-known financial tools for helping startups with accounting, bookkeeping, bill management, cash flow, and more. It offers four different plans, so startups can upgrade to more advanced plans as their businesses grow. QuickBooks integrates with many other tools, including HubSpot’s CRM, allowing you to have all of your customer or financial data in one place.

Wave

Wave is another popular accounting, billing, and invoicing service available to startups. Companies can incorporate payroll, customer billing, online payments, product or service price quotes, and more through one easy-to-use platform. There’s a free plan that offers unlimited invoices, bills, and bookkeeping records to get you started.

Xero

To combine sales information and accounting, consider Xero. This platform is designed specifically for small business accounting and offers financial records, online payments and invoices for faster payments, expense claim tools, payroll, inventory tracking, and more. The Established Plan even offers cash flow predictions, and Xero’s partnership with HubSpot offers real-time cash flow tracking from any device.

Forecastr

From cash flow forecasting to financial modeling, Forecastr helps startups better handle their finances and ultimately impress potential investors. This economical tool includes free financial modeling templates as well as a three-statement model that combines a cash flow statement, a profit-and-loss statement, and a balance sheet to determine financial projects true to your business. Forecastr also integrates with top accounting platforms like QuickBooks and Xero and even offers each customer access to a dedicated financial analyst to help review and stay on top of cash flow. Startups can request more information and quotes from Forecastr here.

Pulse

Unexpected expenses can throw a wrench in a startup’s spending and scaling plans, but Pulse is here to help. This tool offers profit forecasting by different clients and projects, multiple cash flow views, and scenario testing to help better prepare for incoming payments and surprise expenses. It’s easy to track cash flow with this service, which allows you to see how specific expenses and income sources affect your startup’s bottom line.

Cacheflow

The aptly named Cacheflow is another smart tool for early-stage startups to manage their cash flow. This app incorporates AI to speed up the time between invoicing customers and receiving payments to reduce your DSO. Helpful features like options for usage-based pricing or tiered payments and payment plans make closing deals easier, and the tool allows the customer to spend less time and fewer clicks from product selection to purchase.

Float

Float is a cash flow forecasting tool that offers easily digestible visuals to track and understand the health of your business. Users can toggle certain scenarios, like projects or new hire costs, to see how different decisions will impact cash flow, and Float will trigger warnings for actions that would threaten a negative cash flow. The tool also integrates with common accounting software, like QuickBooks and Xero, for accurate forecasting based on existing financial data for your startup.

Manage your startup’s cash flow wisely

When it comes to managing cash flow, the hardest part is just to set up a system. Once you create a strict schedule of checking in with your startup’s finances, it will become a helpful habit to track the health of your business. 

Even the most cash-strapped startups can improve their cash flow management in many ways, from tracking KPIs to using manual templates or automated tools.

“Put the process in place and stick to it,” Erickson advised. “Force it into your monthly playbook that we carve out an hour, or whatever that amount of time is, every single month on this day to review our financials. How did we do last month versus what we were projecting? Do that religiously.”

Be sure to explore the HubSpot for Startups resources page for more helpful tips and tools on managing cash flow, improving finances, impressing investors, and overcoming other major startup challenges.

Send DataSend DataSend DataSend DataSend DataSend Data