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Insufficient capital contributes to the failure of many startups. When you do not have enough money to cover your expenses, you may find yourself in a dangerous situation. The time it takes for customers to find your product or service is often underestimated by business owners. As long as your sales and marketing efforts are not paying off, you must still pay your monthly expenses, including rent, utilities, staff, materials, equipment, and more. Even if you have customers, the payment terms often don’t align, and you must pay your vendors and employees before your customers compensate you. It is common for a business to fail before the product or service can even be tested for profitability. So, if you want to be in business for the long haul always make sure to have enough capital to fund your business.
But how much cash/capital do you need? The answer is simple: set careful and realistic budgets for at least the first 6 months of your startup business. In combination with sales and cash flow forecasts, you can determine any cash shortage and it gives you plenty of time to arrange financing/funds. A clever idea is simply not enough! You need to ensure that you have access to sufficient capital to get through the phase of cash outflows. This is until you have enough money coming in. BTW, if you decide to go to a bank to ask for money, the first thing they want to see besides your business plan is your cash flow forecast.
Even if you make it through the first few months of your startup, you will still need to track your money movement to be sure you have enough cash to pay the bills. Managing cash is critical to the success of any business, whether it is a startup or an established business. But having sound cash management is not something that happens by chance; you have to make sure it happens.
How should a company manage its money? It is accomplished through the use of budgets, cash flow management, and forecasts. The first step is to determine your variable and fixed costs. Budgeting for fixed costs is simple since the amounts remain the same at least over the short term.
Variable costs are influenced by certain activities or cost drivers. Knowing how many products you will sell, for instance, will help you figure out what manufacturing costs will be. When the sales forecast is done, you can decide how much to budget for variable costs. Estimating the number of customers can be challenging when creating a sales forecast. Therefore, detailed market, customer, and competitor analyses are crucial. Run a sensitivity analysis based on these numbers to see how profits might change if customer demand drops or rises.
Analysing the cost of manufacturing a product or service and simply adding a markup is not sufficient. Additionally, it is imperative that you take into consideration the true market price/value and determine what the demand is and what customers are willing to pay. How much do your competitors charge? It is possible that someone in the market is underpricing you if the price is too high. Decide what price to charge based on the market and manage your costs accordingly so you are still able to make a profit.
Another significant problem with price calculation is that business owners do not consider and cover all of their costs when entering the market. In order to gain market share, you may offer a lower price as a promotion, but this strategy is not sustainable. Over the long term, you must cover all your costs.
Growth must be handled carefully, or it could be fatal to your business. Growth often requires cash, which is something that new businesses do not have in abundance. There are many business owners who mistakenly believe that the solution to their cash flow problems is to grow faster. They fail to realize that fast growth is the root cause of their cash flow problems.
In what ways does growth affect cash flow? Growing faster means purchasing and paying for more, selling it, and then waiting for the customer to compensate you. There are higher expenses that you must pay upfront before you receive payment.
In summary, effective financial management practices are fundamental to the success of any organization. A financial expert can help you identify the weaknesses of your business and identify the areas that need to be addressed first. You wear many hats as a business owner, but if you are not familiar with numbers, you should hire someone who is. At numberoo, we love numbers.
