Cash flow and debt management are both essential aspects every entrepreneur must wrestle with. While start-ups will get a smoother relationship with these two aspects over time, the initial start-up phase is usually the most difficult to deal with. Funding is limited since your company remains relatively nascent and untested, and so investors are holding out financial support until you can prove your company to be valuable.
Here are four other reasons why you should build good cash flow and debt management habits as a startup CEO.
Ability to Pay Expenses
First and foremost, managing cash flow effectively means you can pay expenses month after month without fail. In 2010, according to a report from the Oklahoma State University, 60 percent of businesses suffered major cash flow problems, up by three percent the year before. Today’s business owners must pay extra attention to cash flow since customers take longer to pay their lines of credit. If mismanaged, you’ll have difficulty paying your suppliers and employees on time, which is never a good impression.
Ability to Expand Business
A start-up’s ability to expand into new markets and business models is predominantly based on its ability to manage cash flow. If you can strategically allocate cash to parts of the business that you benefit most from without having to take on too much debt, you’ll have access to more growth opportunities. On the other hand, ineffective cash flow management leads to an exorbitant amount of inventory, long payment terms, overspending, and overextending your boundaries among other problems.
Access to Loans
Carrying positive cash flow is always a good sign from the viewpoint of lenders, be it banks or a private source. In fact, these days when economies are struggling and cash is drying up, lenders require more than just your tax returns and personal financial data. Your business’ cash flow must also be vetted to determine your overall creditworthiness. Be smart about securing a loan for your startup. Use a loan calculator to make quick accurate estimates of your desired loan contract.
Debt has Prioritization on Company Assets
Obviously, unpaid debt is bad for any business entity, whether it be a startup or a large corporation. What is seldom talked about, however, is the debilitating effects of debt. In the event that a startup fails to pay its debt, the owner of that debt will bypass any previously agreed upon terms by the startup and its shareholders and be given priority over the company’s liquidated assets. In short, when you go belly up, shareholders take a significant hit, which could ultimately give you a bad rep in the business world. From there on out, you’ll have a harder time finding investors or partners for your next venture should you decide to take a second shot.
Fortunately, it doesn’t take a Warren Buffet, Bill Gates, or any of the other brilliant business minds to manage cash flow and debt of a startup. With unfading persistence and some practice, you’ll be able to commandeer your ship to a more financially sound path.