6 Strategies for Optimizing Cash Management When Starting a Business

I was asked in an interview once what the three biggest mistakes I made were when starting my business. In coming up with a response, I quickly realized they all revolved around cash management. (For those wondering, I started undercapitalized and with a negative net worth, not understanding the importance of managing a balance sheet and cash flow, and entering a number of down business cycles without enough liquidity to seize opportunities properly.)

Effective cash management is an indispensable skill for entrepreneurs. It plays a pivotal role in the success and sustainability of a venture, and if the metaphor for a business is an engine, cash would certainly be the fuel. Without proper management of cash resources, i.e., enough fuel to keep the engine running, no business can survive, no matter how good the idea is.

Related: 3 Cash-Management Strategies for Improving Cash Flow Issues and Optimizing Efficiency

The challenges of cash flow

Entrepreneurs must understand cash flow dynamics as early on in the process of starting their business as possible. It allows you to anticipate and manage your company’s financial health, weighing sources such as customer payments, loans or investments against rent, payroll and supplier payments, to name just a few inflows and outflows. The timing of these inflows and outflows can seriously impact a company’s ability to cover its financial obligations, invest in growth and weather financial uncertainties.

Businesses in their earlier stages are also more likely to face challenges with cash flow due to their newness and instability. Irregular revenue streams, high upfront costs for product development or marketing, and the time it takes to establish a customer base are all stepping stones that are unique to new businesses that hold the potential to make or break a company. Entrepreneurs also may underestimate the time it takes to convert sales into cash, leading to temporary cash shortages. Seasonal fluctuations, unexpected expenses, or delays in accounts receivable collection can exacerbate cash flow problems.

When cash isn’t managed effectively, it becomes a struggle to meet its financial obligations, leading to missed payments, damaged supplier relationships and even — God forbid — legal troubles. As I experienced myself in the early days of my company, insufficient cash reserves can also hinder growth opportunities and prevent a business from capitalizing on strategic opportunities or adapting to market changes. Consistent poor cash management will eventually erode confidence in your company, making it difficult to secure funding in the future or build new partnerships. Ultimately, poor cash management causes much more than financial woes; it’s a fundamental threat to a business’s overall sustainability.

Related: 10 Expert Tips on Managing Cash Flow as a New Business

Strategies for optimizing cash management

While my company is now over four decades old, I can still remember the pain points I felt in my early days of learning cash management. Below, I have highlighted what I believe to be essential strategies for getting a handle on cash flow early on and setting your business up for success and longevity.

1. Create and maintain a cash flow projection: First and foremost, entrepreneurs should always have a detailed cash flow projection that outlines expected cash inflows and outflows over a period of time. Companies should aspire to be proactive rather than reactive whenever possible. With a well-constructed cash flow projection, entrepreneurs can make informed decisions about resource allocation while also mitigating financial uncertainties.
2. Set realistic financial goals: This may seem like a no-brainer, but you would be surprised how many people don’t understand what “realistic financial goals” entail. Whether you are a party of one or your business has grown into a team, short-term and long-term financial goals in tandem create a roadmap that guides decision-making. Without clear and achievable financial goals, overspending and underspending are more likely.
3. Keep an eye on costs: Make a point to regularly review your expenses and identify areas where costs can be reduced or eliminated without compromising the quality of your products or services. Consistency is the key factor that is most often neglected, but what was once deemed essential can become superfluous in just a few months. We all have that subscription service that is being charged to our personal bank account each month even though we no longer use it—small expenses over time can quickly add up to be large detriments and opportunities lost as a result.
4. Negotiate supplier terms: Another common trait I have noticed in entrepreneurs first starting out, is a hesitancy to negotiate. Our society’s relationship with money is strange — many of us have grown up being taught that talking about money at all is impolite, but to successfully optimize cash management, one must get comfortable with speaking openly about it. Negotiating favorable payment terms with suppliers, such as extended payment deadlines or early payment discounts, can help you manage your cash flow more effectively.
5. Consider cash reserves: Maintain an emergency cash reserve to cover unexpected expenses or revenue fluctuations. Having cash on hand ensures you can continue operations without relying on credit in times of need. Much of the narrative today likes to talk about how we live in “uncertain times.” Still, as someone who has navigated a business through several financial downturns over the past forty years, I can tell you that there will always be periods when you need to be able to rely on cash reserves. Don’t underestimate their importance.
6. Regularly review and adjust: Cash management is an ongoing process that requires continuous attention and adjustment. Regularly monitoring cash flow and reviewing your budget makes your business agile and resilient in the face of changing market conditions, allowing you to seize opportunities and mitigate financial risks effectively. As the saying goes, there is no “holding steady” in business.

It’s a dynamic world, and optimizing cash management means consistently reassessing what is working and what isn’t for your business. The earlier you learn this, the better.