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What are the most effective ways to reduce cash flow and risk in a startup?

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Cash flow and risk are two of the most critical factors that determine the success or failure of a startup. Without enough cash to cover your expenses, you may run out of runway and go out of business. Without managing your risk, you may face unexpected losses, legal issues, or market changes that jeopardize your growth. Therefore, as a startup founder or financial manager, you need to know the most effective ways to reduce cash flow and risk in your startup. In this article, we will share some practical tips and strategies that can help you achieve this goal.

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Colm Reid

Chief Financial Officer @ Urban Green Private Limited | FCMA, Fellowship of CIMA

1 Track and forecast your cash flow

One of the first steps to reduce cash flow and risk in your startup is to track and forecast your cash flow regularly. This means recording your income and expenses, both actual and projected, and analyzing the difference between them. By doing this, you can identify your cash flow gaps, surpluses, or bottlenecks, and plan accordingly. You can also spot any trends, patterns, or anomalies that may affect your cash flow in the future, and adjust your strategy or budget accordingly. Tracking and forecasting your cash flow can help you avoid cash flow crises, optimize your cash flow cycle, and improve your decision-making.

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Michael Matthews

Currently Retired
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Vital for every business, large or small you MUST know where the money comes from and goes to, also where you can speed up inputs and slow down outputs so that you are in control.

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Doris Kelly

Lecturer
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The goal is not necessarily to reduce cash outflows because some cash outflows can be a good decision like investing in assets that will create cash inflows in the future. The goal is to manage your cash flows so you have a net increase in cash which is difficult for a startup to achieve. However, properly managing your cash flows as a start up will help determine your cash needs. You can have a great idea which could be very successful, but if you don’t manage your cash, the company can fail. Even companies that are profitable can fail with poor cash flow management.

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2 Cut unnecessary costs and optimize expenses

Another way to reduce cash flow and risk in your startup is to cut unnecessary costs and optimize your expenses. This means eliminating any spending that does not contribute to your value proposition, customer satisfaction, or revenue generation. For example, you can reduce your overhead costs by outsourcing, automating, or using cloud-based services. You can also optimize your expenses by negotiating better terms with your suppliers, vendors, or creditors, or by finding cheaper alternatives. Cutting unnecessary costs and optimizing expenses can help you increase your cash flow margin, reduce your break-even point, and free up more cash for growth or emergencies.

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Colm Reid

Chief Financial Officer @ Urban Green Private Limited | FCMA, Fellowship of CIMA
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For a new business, this poses a challenging dilemma as investing in your team is crucial for success. The age-old adage rings true: being overly cautious with small expenses while neglecting larger, more impactful investments can be detrimental in the long run. "penny wise, pound foolish"

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Michael Matthews

Currently Retired
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This is really basic but ALWAYS get a number of quotes, also cheapest is always best. See whether working with suppliers can get better deals.

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Doris Kelly

Lecturer
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Negotiating better credit terms and prices is always a good business move, however cheaper alternatives may not be. Cheaper materials used in manufacturing can actually increase costs (more material needed in production due to poor quality). Cheaper materials can also have an negative effect on sales/revenue (loss of customers).

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Doris Kelly

Lecturer
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Negotiating better credit terms and prices is always a good business move, however cheaper alternatives may not be. Cheaper materials used in manufacturing can actually increase costs (more material needed in production due to poor quality). Cheaper materials can also have an negative effect on sales/revenue (loss of customers).

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3 Diversify your income sources and customer base

A third way to reduce cash flow and risk in your startup is to diversify your income sources and customer base. This means finding new ways to generate revenue from different products, services, markets, or channels. For example, you can create additional value for your customers by offering complementary or ancillary services, upselling or cross-selling, or creating recurring or subscription-based revenue models. You can also expand your customer base by reaching out to new segments, niches, or regions, or by leveraging referrals, partnerships, or networks. Diversifying your income sources and customer base can help you reduce your dependence on a single or few revenue streams or customers, and increase your cash flow stability and resilience.

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Michael Matthews

Currently Retired
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Finding new income streams is important, however make sure they continue to be profitable and do not unduly distract you from the main income generation areas of your business. I once knew an accountant who offered a low cost photo copying service which constantly distracted him from his main work. Also ensure you are not over dependent on any one customer.

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4 Manage your inventory and receivables

A fourth way to reduce cash flow and risk in your startup is to manage your inventory and receivables. This means optimizing the amount and turnover of your inventory and receivables, and minimizing the risk of obsolescence, theft, damage, or non-payment. For example, you can manage your inventory by using just-in-time or lean inventory systems, implementing inventory control policies and procedures, or using inventory management software. You can also manage your receivables by setting clear payment terms and conditions, invoicing promptly and accurately, following up on overdue payments, or offering discounts or incentives for early or cash payments. Managing your inventory and receivables can help you reduce your cash flow blockages, increase your cash flow velocity, and protect your cash flow quality.

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Colm Reid

Chief Financial Officer @ Urban Green Private Limited | FCMA, Fellowship of CIMA
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In many businesses, these represent the primary liquid assets and can swiftly spiral out of control. One crucial lesson I learned was to avoid making sales based on credit terms that fall outside the parameters outlined in your business plan.

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5 Seek external funding and support

A fifth way to reduce cash flow and risk in your startup is to seek external funding and support. This means exploring various options to raise capital or obtain financial assistance from external sources, such as investors, lenders, grants, or subsidies. For example, you can seek external funding by pitching to angel investors, venture capitalists, or crowdfunding platforms, or by applying for loans, lines of credit, or overdraft facilities. You can also seek external support by applying for grants, subsidies, or tax incentives from government agencies, non-governmental organizations, or industry associations. Seeking external funding and support can help you increase your cash flow availability, reduce your cash flow pressure, and leverage your cash flow potential.

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6 Mitigate your risks and uncertainties

A sixth way to reduce cash flow and risk in your startup is to mitigate your risks and uncertainties. This means identifying, assessing, and managing the various risks and uncertainties that may affect your cash flow or business performance, such as market risk, operational risk, financial risk, or legal risk. For example, you can mitigate your risks and uncertainties by conducting market research, competitor analysis, or customer feedback, or by using scenario planning, sensitivity analysis, or contingency planning. You can also mitigate your risks and uncertainties by implementing risk management policies and procedures, or by using risk management tools, such as insurance, hedging, or diversification. Mitigating your risks and uncertainties can help you reduce your cash flow volatility, increase your cash flow confidence, and enhance your cash flow sustainability.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Colm Reid

Chief Financial Officer @ Urban Green Private Limited | FCMA, Fellowship of CIMA
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The most accomplished entrepreneur I had the opportunity to work with consistently checked and analysed their bank balances and financial statements. This regular practice was aimed at comprehending the outflow of cash from the business, allowing them to develop a profound understanding of the mechanisms driving the company's cash flow.

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What are the most effective ways to reduce cash flow and risk in a startup?

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1 Track and forecast your cash flow

2 Cut unnecessary costs and optimize expenses

3 Diversify your income sources and customer base

4 Manage your inventory and receivables

5 Seek external funding and support

6 Mitigate your risks and uncertainties

7 Here’s what else to consider

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