Cash flow—the amount of money that comes in and goes out of a business—is often a concern for many new companies. Generating a healthy cash flow requires careful planning and a commitment to a strong operational strategy. However, a lack of experience in cash flow management as a new entrepreneur can put you at a disadvantage.
That’s why we asked 10 members of Young Entrepreneur Council about common cash-flow mistakes new business owners tend to make when they’re starting out. Here’s what they had to share from their experiences.
1. Not Counting Convertible Notes As Company Debt
If you are raising funding with convertible notes, be sure to remind yourself that they are technically company debt before being converted to equity, and the investors have the right to request repayment once the maturity date passes. Although it is uncommon for reputable investors to call the note, other founder friends have told me several horror stories where the company took serious damage after investors used the repayment right as unfair leverage in future negotiations with the founders. – Tinghui Zhou, Humen, Inc.
2. Not Thinking Through Invoicing And Cash Cycle
Many new entrepreneurs will be off to the races to secure inventory or a contract, but they will feel they don’t have the leverage to negotiate, accepting the vendor terms dictated to them whether it means being required to pay upfront, 50% upfront or net 15 days. However, it is vital when cash is limited to think thoroughly and honestly through your cash cycle. How long will it take you to sell your product and bring in revenue to cover the cost of your inventory? If you honestly believe it will take 45 days to sell through your inventory, then fight for net 60 and spread the payment out. Really think through your payment schedule and your cash flow so you can preserve your working capital. – Amanda Signorelli, Techweek
3. Failing To Consider Payment Timing
We had a customer who was supposed to pay us 30 days from the invoice, but they didn’t make the payment until 90 days. Meanwhile, we had been continuing ongoing sales to the customer while paying out suppliers earlier than we were paid by the customer. The result is a cash flow gap that we had to finance, fortunately, through a bank line against receivables, but there’s a cost to that credit line! You never really want to charge a customer late fees as it can sour a relationship. Instead, we incorporated that slow timing into their price and rewarded them for paying on time. – JT Allen, myFootpath LLC
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4. Investing Too Much Too Soon
It is challenging to right-scale and balance investments across functions at a startup. Investing early in marketing to drive thought leadership and get market feedback will establish presence next to alternative solutions. But these investments should reflect the maturity and development stage of the company rather than trying to replicate what other well-established competitors pursue. – Jack Kudale, Cowbell
5. Billing Fully In Arrears
One common mistake made by first time entrepreneurs, especially those who launch a service business, is billing their clients totally in arrears as opposed to asking for full or at least partial payment upfront. I learned the hard way several times that sometimes even large companies face problems and may either declare bankruptcy, slowly pay their bills or even walk away without paying for services already rendered. – Evan Nierman, Red Banyan
6. Raising Capital Without A Strong Foundation
Time and time again, I hear of startups raising a ridiculous amount of capital without a strong foundation, time in the market and a clear identity. The capital raised is used poorly and there is too much trial and error. This creates a vicious cycle of constantly needing more funding, taking you away from focusing on growing the business and never allowing you to build that strong foundation. By looking for lines of credit and small business loans, you alleviate cash-flow issues while still growing at a manageable pace. In the beginning, our steady organic growth versus a large capital injection gave us a strong, long-lasting foundation. 15 years later, we continue to consistently grow without taking on investors. – Anna-Mieke Anderson, MiaDonna & Company
7. Collecting Revenue On Trade Terms
It seems paradoxical that a fast-growing business can run out of cash and fail. This happens when revenues are collected on trade terms, such as net 60 or net 90, but costs are paid for in the current month. When I started GoLastMinute, I watched marketing expenses closely and often cut off campaigns before the end of the month to stay within budget. This discipline helps us scale up our annual revenue while maintaining profitability. – David Boehl, GoLastMinute
8. Not Looking Critically At Each Expense
You should justify every expense and ask yourself how it is going to pay for itself. You would be surprised how often expenses do not pass this test. Using this mental exercise on each purchase will keep you from spending money on unneeded expenses and help you better understand the purpose of that purchase. This is particularly true for recurring expenses that can easily strain the cash flow of a new venture. – Joe Morgan, Joe’s Datacenter, LLC
9. Relying On Your Bank Balance For Cash Flow Insight
New owners rely too much on their bank balance for insight into their cash flow, but the balance does not reflect your true cash position. Instead, the business owner should look at cash flow forecasting to more accurately determine accounts payable, accounts receivable and expected revenue. You would want to know more than just a few months out where you stand. For example, if you are trying to figure out your cash flow for Q1 2021, you can more accurately determine this by forecasting expected sales. While you may not always hit the exact goal, you’ll still get a pretty solid picture of cash flow. – Marjorie Adams, Fourlane
10. Not Leaving Enough Room For Contingency
Everything seems to take a bit longer than you could have imagined (whether because of administrative tasks or delays in manufacturing), so leave extra room in your budget for contingency. Alternatively, I always say leave a little room as well for magic as great things that you weren’t prepared for can happen too whether it’s getting a big retailer on board for thousands of stores or securing a partnership where you need to hire more staff. – Sara Bonham, Willow Cup (dba Perennial)