Cash flow is critical to any business, especially to startups who are trying to grow against the odds in their first year. We speak to industry experts to get their insight into overcoming cash flow challenges in the early stages of a startup’s life
With more than 50% of startups notoriously failing, having cash flow issues is certainly one of the main reasons that a new business fails to get off the ground. When bringing a new idea or concept to market as a startup, cash flow can often become a real challenge, with mounting costs from development, compliance and staff.
The ability to manage cash flow successfully both internally and externally can be crucial to a business’ success. Here we speak to several finance experts to understand first-hand how startups can improve their cash flow in the early stages.
Most people get excited when launching a new startup, says Richard Allan, founder of funding platform Capital Bean.
“The freedom, the lifestyle change, the passion, but actually you are really starting from scratch and you have to prepare for quite a scrappy year in year one. says
“To really compete in the fast-paced business world, it can take time to get your concept up and running and year one is spent mostly creating your proposition and dealing with things like legals and hiring,” he says.
“So, when it comes to cash flow, you should anticipate the idea that you may not make any revenue and you may have to keep reinvesting to consolidate your business idea or model, especially if it is an app, platform or there is tech involved.
“You need to imagine that something does not work, look right or requires multiple iterations. You may not get everything right on the first go, so you have to budget for this accordingly,” he adds.
Should you need to get additional funding or extra money to cover the gaps, it helps to have access to capital, in case you need it, according to Justine Gray, founder of consumer finance startup Dollar Hand.
“Some startups start with funding rounds or just using their own savings,” she says. “But very often, startup founders become full-time fundraisers looking to secure their next round of funding when the pot runs out.
“In the meantime, there are a number of short-term financial options which are affordable. You might look at credit lines from your bank, using business credit cards to draw down money when you need it.
“On a personal level, you could look at using more of your own personal savings or even borrowing money from family and friends if you are really starting to make progress.”
To be efficient with cash flow, you may look at using your existing cash more effectively and today, there are some clever cost-cutting measures that you can take in the early stages of your startup.
“One of the most common things as a startup is to get a grand office and start hiring people,” says Benjamin Sweiry, co-founder of Dime Alley.
“But actually in the early stages, you should be trying to cost-cut,” he says. “Rather than pay office rent, you may only need a desk, which could be at home on the dining room table, a spare bedroom or even just having a desk at the office of a friend or family member.”
When it comes to staff, why not trial people on a daily basis,” suggests David Soffer of Proper Finance.
“You can find some subcontractors and freelancers for just 2-3 days per week and studies in places like Sweden have shown that shorter working weeks encourage staff to be more focused and efficient – and also be a huge cost saver.
“It also gives you the opportunity to scale up with more staff and more days if you are making some exciting growth as a company,” he adds.
