For many startups, running low on cash is a common problem. There is already limited capital to start with, but when combined with a lot of variables along the way, a startup can easily find itself in a tight financial spot.
If your startup is experiencing this exact problem and it’s already too late to correct cash flow issues, all hope is not lost. While it’s best to consult with an experienced bankruptcy lawyer to prepare for the worst, it may not even come to that point just yet. Here are some of your viable options when your startup is running out of money:
Use your emergency fund
When your cash reserves (assuming that you have some) are starting to disappear, hopefully, you still have an emergency fund to save you. You may think that now is not the best time to touch your emergency fund because “what if there is a bigger emergency later on?” but it’s better to avoid cash problems now by using your emergency fund than have them grow larger if you don’t.
However, be sure to use your emergency fund strategically. Use it to pay your most important bills. Invest it in new equipment or strategies that can help improve your cash flow. Hire someone to help you get out of this pinch. Whatever you do, make sure that your next moves are worth the limited cash you have on hand.
Focus on what you can control
As soon as your cash flow starts to go south, sit down and make a list of what you can control right now. It makes no sense to spend time worrying about things that are out of your control, and the things that you can control needs your utmost attention. Look at your accounts receivables and start collecting invoices. Get rid of bottlenecks that are slowing down your growth. Find ways to pay your bills at a later date or through a staggered payment scheme. And so on.
Finance your invoices
One of the biggest cash flow problems for businesses is slow invoice payments. In fact, it can take as long as 90 days to receive a payment from a client because they also have to take care of their own cash flow. But if you’re a startup, chances are, you can’t wait three months or even a month to receive payment–you have bills to pay right now, and your money is tied up with your clients.
To speed up invoice payments, a good strategy is to offer discounts to incentivize clients to pay early. It doesn’t have to be anything grand–a 2% discount can already be significant enough to get clients to pay earlier. Alternatively, you can also offer exclusive promotions, such as free items or services, instead of cash discounts.
However, this strategy may not be enough to supplement your cash flow. Another way you can address this issue is by using invoice factoring services. With this, you can receive funds immediately from a factoring company instead of waiting 30 or 90 days for payments from your clients. You can use this as a one-time fix for your cash flow problems, but you can also use it as a revolving line of financing.
Cash is tight, so it only makes sense to start getting rid of the less necessary expenses. This could mean making small changes like using fewer lights in the office or getting rid of the free coffee for now. But to make a significant impact on your steadily decreasing cash flow, you may have to make big changes like reducing supply expenses, putting big projects on hold, and perhaps selling some of your large assets.
Letting people go should be your last resort, especially for startups that have to work hard to retain good talent. If you must reduce your workforce to save on labor costs, try reducing hours first or asking people if they would take a temporary pay cut in exchange for higher pay in the future.
Tap into your personal finances and network
When worse comes to worst, you may have to use your personal funds to keep your business afloat and until you get out of the woods. If your funds aren’t enough, consider tapping into your network of colleagues, friends, and family for financial help.
Running out of money doesn’t necessarily mean that your business is doing poorly. Oftentimes, it’s a problem with cash flow. But whatever the reason may be, running low on cash is something that you have to address as soon as possible. Otherwise, you may find yourself facing even bigger financial problems or worse, losing the business entirely.