Startups are always a gamble, and they face an uphill battle when they first open their doors. One of the greatest problems any startup faces, especially during the first year, is cash flow. These new businesses lack the connections, reputation, and experience that supports their competitors’ success. Even in the age of online markets, there’s a limited pool of consumers to draw from. Startups begin at a disadvantage that hurts their chances of winning customers from that pool, and internal problems can cause a startup to hemorrhage that precious revenue. Cash flow problems are much easier to address once they’ve been analyzed, however. We’ve identified the primary cash flow problems startups face and examine the underlying causes. First, and most importantly, is an undeveloped customer base. After this primary concern come internal finance issues, including unplanned spending and inefficiencies.
Undeveloped Customer Base
The entire point of a startup is that it is new. While customers enjoy new products, it’s tricky to win them over a new business. Customers trust brands and previous experience, so when a startup begins advertising, they have to wait for their first batch of adventurous customers to spread the word. Word of mouth is probably the most powerful advertising method in the world. This is especially true for startups. Unfortunately, it’s also one of the most time consuming. Trust does not come cheap, and it certainly doesn’t come quickly.
Another key challenge to a startup’s cash flow is the lack of regular customers. Repeat business is, again, a sign of trust, and that comes with time. Many customers who enjoy trying out new businesses are also looking for either novelty or reduced rates. Once the novelty has worn off, or the special deals and offers have expired, they move on. During this period of growing customer connections, startups see dramatic spikes and falls in revenue that make it almost impossible to predict what the cash flow will be like the following month.
Startups have a lot of costs, and those costs tend to linger longer than expected. If a startup rents an office space, they may find it unfurnished. A new landlord may also change the terms of rent after the first month or two of operation. Basic costs such as office supplies, merchandise, business cards, POS systems, and bookkeeping software also require a lot of small, frequent investments. After all, a lot of software products today are SAAS, which demand monthly subscription fees. Startups don’t always figure these lingering expenses into costs when they speak to investors, or don’t plan far enough in advance to cover several months’ worth of fees.
No matter how well you plan, things will always surprise you. While things can go better than expected, storms, recessions, and product recalls can transform a profitable startup into a struggling one. Since startups are new, they simply do not have the depth of resources to last out unfavorable circumstances. If there is actual damage to the startup’s property, few will be able to proceed without additional funding. After all, while a good startup asks for enough initial funding to cover a few unforeseen circumstances, borrowers must be careful not to exceed what investors are willing to pay. It’s a delicate balance that all too many new startups fail to manage through no fault of their own. The cost of additional loans puts an indefinitely strain on cash flow, setting the new business back.
There’s nothing easy about managing a business, especially a new one. Chances are, the startup’s primary operators will lack some critical expertise. The demand of multitasking their new roles inevitably pushes them beyond their previous experience. For example, few startup leaders have much, if any experience with bookkeeping software. Good records are essential for not only taxes, but business growth and security in general. The lack of experience leads to many little inefficiencies that can cost a startup a lot of their cash flow. Those efficiency gaps appear all over a startup. It’s natural, but it’s frustrating, and startups that manage them will have dramatically fewer cash flow problems.
Startup cash flow problems depend on factors both inside and outside your business. While you can address some directly, others remain beyond your complete control. Taking the time to study and develop new skills, especially for management, bookkeeping, and vendor relations will trim back costs. While you can’t control the weather, your landlord, or the forces of the open market, you can plan for the worst from the very beginning. Expanding early is tempting, but bookkeeping with problems in mind can help you give your startup back up funds that can stave off cash flow disasters. By examining the weaknesses of your particular business, you can get the most out of your cash flow, no matter how large or small it turns out this month.