It is a well-known fact that a lot of startups shut shop because of liquidity issues. There came a time while running Superchooha [My ex startup], we had Rs. 200 in the bank account and had salaries to pay in a few days, salaries to the tune of Rs. 2 lakhs. We scraped through those months, but it helped me learn a bunch of lessons, which I now apply to my second startup SocialSamosa.com
A cash flow statement comprises of out goings, incomings and cash reserves. So let us also break this post into three parts.
- 1 Tips to deal with Cash Outgo
- 2 Tips to deal with incomings
- 3 Tips to save liquid cash
Tips to deal with Cash Outgo
Delay Vendor payments:
Don’t pay your vendors before a month from the date of the invoice. Enjoy the credit period, but don’t push it beyond that. Having healthy vendor relationships helps the startup grow.
Pay bills a day before the due date:
Most utilities bills have a month long credit period. Make most use of it and pay all the bills only a day or two before the due date. Make sure you mark dates on a calendar, else you will end up paying late payment charges.
Pay bills via credit card:
Pay all utility bills using your credit card. That effectively will give you another month’s time to breathe. But do make sure you pay credit card bills on time, lest you will have a huge interest mounting up.
Pay salaries by mid-month
Most companies pay salaries in the first week of the month. As a startup you can afford to pay by the 15th of each month. That saves you a few days by when hopefully your incomings will drop in.
Tips to deal with incomings
Plan with credit period in mind:
Most clients, especially the big ones, have a minimum of 60-90 day credit period. That’s a straight delay of 3 months. And all this while, you still have to pay your office expenses, salaries, the chai and so on. So either start with some cash reserves or plan accordingly. Hire only when you have enough savings to pay for all outgoings for 3 months. Do the same when renting an office.
Clients/customers can be really cruel when it comes to shelling out the money you deserve. Keep sending reminders to them. Some of them do have a conscience and hence decide to pay by the 10th or 12th reminder. I say this out of experience. One of the bigger clients of Superchooha paid us almost after a year.
Expect bad debts:
Don’t plan your finances neck to neck. Keep some buffer in between. Sometimes the best of best clients default on payments. Not everyone does it intentionally, sometimes businesses fail and our money gets stuck. If we have some buffer in our accounts, it gives us enough time to get a new client and thus a fresh source of income coming in.
Take post-dated cheques:
It will be a rare case that clients will agree to give postdated cheques, but wherever possible push for them. In spite of this there will times when the client will call in to hold payments, but on good days it will ensure timely inputs to your bank balance.
Tips to save liquid cash
Limit your outgoings:
Don’t rent a swanky office or hire the costliest talent right away. For the first year and a half, me and my partner worked out of home with a laptop and an internet connection. Post which, to place our first hire we used a friend’s office. By then we had saved enough to get ourselves an office. But that too was a rented one in a residential area to save costs.
If you are not exactly a money person, seek help from someone who is. It doesn’t need to be professional help. I often took help of my parents for my first start up. They would stop me from making unwanted purchases and would also fill in with smaller amounts if payments got delayed.
One of the worst ways to block cash is to buy expensive items. Unless absolutely necessary, rent everything from the office to the computers to the AC.
Take short term loans:
Short term loans are an effective way to save yourself from drowning. Family and friends often help and most don’t charge interest. Personal loans or loans on credit cards are also options that will fuel in some money. I was however extremely wary of loans and used it for Superchooha only once, that too for an office deposit, which is relatively safe.
After my first startup I am well equipped to handle finances for Social Samosa. Though we are still investing money, we have got our basics right. We don’t have an office yet and the team works from their respective homes. We didn’t get our full time hire till the time we thought it was absolutely necessary. Precautionary measures like these will help you go a long way since cash flow often tends to become the backbone of any company.
[About the Author: A Social Media strategist and consultant, Ankita Gaba has co-founded her second start up, Socialsamosa.com, an Indian Social Media Knowledge Portal. She loves networking and is a shoeoholic. You can tweet to her at @ankitagaba]