OWhile profits are the ultimate measure of business survival, cash flow is what keeps a business going day in and day out. In this rapidly changing economic environment, it has never been more true that cash flow is the most important indicator of the health of a business. However, keeping the cash readily available can be a messy business, especially for startups. I spoke with five seasoned financial and operational advisors* to learn their strategies for creating and maintaining a reliable cash cushion.
1. Hide a percentage of revenue, every time
Dorothy Kolb admits to an early mistake that plagues countless new business owners: operating from a single checking account. “When tax time came around, I caught myself off guard and had to come up with the money quickly.”
The small business financial strategist and founder of dk east associates recommends keeping income “out of sight, out of mind.”
“Take part of it and put it in a separate account for fixed costs/direct costs. Move some into an account for taxes and profits. Your operating account will only show what you have available for normal monthly expenses. Kolb benefited from this disciplined strategy when the pandemic upended many businesses. “When COVID hit, I had a cash reserve to draw on until things started to pick up again.”
2. Measure lead conversion
Growth strategist Celia Arias has a proven philosophy: “What gets measured gets managed.
Arias is focused on lead conversion, helping clients develop their “measurement muscle”.
“Measuring each step is the key. By knowing your conversion rate at each stage of the customer journey, you know where to focus in your process. We think we need more leads, but first we need a plan to convert leads. The founder of Chella Industries advises a smarter approach to prospects. “Create a simple dashboard to understand your leads, how they convert to sales, and then how they convert to success stories. Sometimes it feels like we have to climb a mountain. don’t need more leads – you need to maximize the leads you have.
3. Assess your “cash trail”
As a CFO of tech startups, Neeta Shah deliberately assesses her clients’ “cash trail” – simply put, the estimated time a company will burn through its capital. “Tracking the cash trail allows you to look ahead and see when your cash will run out, given your current rate of consumption. For example, for tech startups, fundraising for the next round should start with an 18-month track, giving you 12 months to attract quality investors, then 6 months to raise your next round.
At Startup CFO Solutions, Shah helps his clients – fast-spending tech companies – achieve financial success using the cash trail method. Business owners in all industries should take note. “Assessing the cash trail each week has resulted in spending improvements and added much-needed urgency to fundraising.
4. Spend on sales, not leads
One of the obvious ways to improve cash flow is to increase revenue. But how? According to business consultant Camille Nisich, startups should capitalize on sales early in the customer journey, especially when investing in paid lead generation. “A potential customer is most excited about your offer at lead generation time, so why not make them an offer right away?”
The founder of Camille Nisich Consulting shared the example of offering new prospects a paid offer at a reduced price. “It’s important to move quickly toward a sale so you can make the best decisions about the effectiveness of your paid media efforts, even if the sale is nominal. The leads you convert will lower your CAC (cost to acquire) and be more likely to accept an upsell.
5. Establish a relationship with your bank
Revenue growth strategist Sheena Gonsalves wants entrepreneurs to treat bankers like business partners. “Bankers understand the traditional credit market and know where favorable conditions exist.”
The founder of Prism Brand Advisory advises business owners to keep their banker informed about plans and goals. Bankers can help entrepreneurs meet changing cash flow needs by negotiating fees and recommending better products. “It has helped me find financial resources I was unaware of and resolve operational issues that would have taken longer to resolve through a customer service line.”
The bounty ? Bankers can be a great resource for networking. “By establishing a relationship with my banker, I was able to connect with potential customers and business partners.”
*The entrepreneurs in this article are members of The Upside.
Erin Halper is the founder and CEO of upside down, an award-winning accelerator and a community of consultants and industry experts who support and advance each other in the business world. Since launching The Upside in 2017, Erin has advised thousands of professionals on how to redefine 9-5 by creating a respected consulting practice that generates repeat clients and gives them the freedom to work when, where and how they wish. Prior to launching The Upside in 2017, Erin built a 7-year freelance consulting career providing marketing expertise to her private equity, real estate investor and hedge fund clients, which collectively generated over 3 billions of dollars in external financing and procurement.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.