Undeniably, starting a company requires a lot of capital, hard work, and dedication. However, maintaining and keeping the business is even more challenging for many business owners. Hence, regardless of your industry, maintaining a successful company requires consistent and sufficient cash flow to keep the business afloat. Unfortunately, many companies do not have the funds to start, and even when they do, they may experience cash flow shortages later on in the business cycle.
Generally, running out of funds is a common issue for startups and many small enterprises. It is one of the most demoralizing situations that could occur to a business owner. When this happens, founders may be unable to pay their employees, vendors, or any other bills that could enhance the company’s smooth operation. In some worst cases, startup owners may lose their business if they do not promptly address the issue and propose possible solutions. However, it is important to understand that being low on cash does not only affect young businesses or companies that are struggling to get their stand in the market. In fact, companies that are successful and thriving well may sometimes experience cash flow problems. This article explores several funding options and tips to manage cash shortfalls efficiently.
Tips for Dealing with Running a Company Low on Cash
1. Audit Expenditure to cut down:
One of the first tips to deal with running low on cash is to audit expenditures to cut down. Usually, financial difficulties rarely arise suddenly for most businesses. Instead, financial difficulties arise gradually before escalating. You can identify potential issues and have time to seek professional assistance in resolving them by making the sensible decision to audit your company. Additionally, you’ll comprehend more clearly which actions result in success to determine which costs to cut down.
To successfully audit expenditures to cut costs, you need to conduct some research to know exactly what to cut and how to go about it. Also, you need to be honest about how much time you have left if nothing changes. This is sometimes called your “runway.”
However, you can neglect cost-cutting and concentrate on the other tactics if, for whatever reason, things have gotten out of hand and you have fewer than three months of operation remaining. Here are some ways to cut down costs;
a. Audit Subscriptions and Cloud Services
Audit Subscriptions and cloud services that are unnecessary to run your business. Many companies sign up for software-as-a-service programs but never use them. Ask your team if the services for which you get a monthly charge are truly utilized. If they are inactive or no one considers them necessary for their work, consider upgrading to the free version or canceling them entirely.
b. Reduce Recurring Expenses
Reduce recurring expenses that don’t add to the bottom line or contribute to your company.
c. Postpone Salaries and Compensations
Postpone salaries and compensations for employees after you have had an honest conversation with your employees. In auditing expenditures, this should be the last resort, as employees are key to the success of an organization. According to studies, when employees feel valued, appreciated, and understood, they are more productive. Although it is not a desirable decision, it can be necessary to lay off employees, starting with the employees with the least experience or integration in some extreme situations.
2. Find New Ways to Increase Revenue
One of the ways to increase your company revenue is to raise your product’s cost. Generally, one of the most significant factors that might affect your cash flow is price. Sometimes a pricing change works wonderfully. Price increases that take effect right away might increase sales and profit.
However, when you increase the price of your products, you should pay close attention to how your clients respond. If the response is negative, you can make more changes, such as going back to the previous pricing structure or offering more incentives. You might also think about gradually upping your prices at regular intervals.
Rarely do consumers respond to small price increases. Even though a modest price rise may appear insignificant compared to the desired price hike, the increase will trickle straight to the bottom and amplify its impact.
Another way to increase revenue is to focus on short-term, quick wins. Many business owners concentrate all of their efforts on making a significant sale, a substantial loan, or an investment when they need a sizable sum of money to save their company from bankruptcy.
Most of the time, this means they have to wait for a long time and put all of their energy into a solution that might or might not work. Instead of putting all your attention on one thing, you can make small changes that can lead to financial stability, like lowering costs, expanding your market, automating some tasks, or changing the payment schedule.
These minor actions may eventually assist you in obtaining funding to maintain your company.
Additionally, you may sell non-essential assets that are not contributing to the short-term bottom line to get through the crisis. Before proceeding with this option, carefully evaluate your circumstances as they may or may not be worthwhile.
3. Maintain Psychological Strength
As a founder, when you realize the company might be running out of money, it is easy to think the business is crashing, but that might not be the case. This is why it is important to try and remain as calm as possible. This will help you determine whether or not the underlying business issue can be fixed before you run out of money. It could also help explore opportunities for the possibilities of developing the business to be self-sustaining. Staying calm will also help you as a leader to explore solutions, source funds, and make informed business decisions. While it is natural to panic, focus more on pushing forward and exploring solutions while money is still in the bank accounts. Brace for the worst, but try to find a way around resolving the current cash flow shortage. While at it, stay motivated and communicate with investors, and keep them informed.
Ways Struggling Startups Can Raise Funds
Crowdfunding with Friends and Family
Financial support might be hard to come by for a company or corporation, but crowdfunding among friends and family has greatly expanded the options for startups to secure funding when they are short of cash. Family and friends may contribute money in the form of a short-term loan or a longer-term investment in your company.
Although, if you decide to follow this financing option, proceed with caution. Make sure your friends and family members are aware of their commitment and have a written contract in place so that both parties clearly understand all terms.
Use Personal Savings
When you are short of cash, it is a good idea to access your savings and use the money to get through the difficult time you are going through. Although using your own savings can be difficult, it might be advantageous in the long run.
Depending on the startup stage, you can signup for an incubator
Early-stage companies may want to explore getting some cash by registering for an incubator program. You can find incubator programs in almost every city. Incubators regularly support hundreds of new companies, and the support typically spans four to eight months.
Get Help from Angel Investors and Existing Investors
One of the trusted ways to get funds when you are short of cash is by seeking help from angel investors or existing investors. An angel investor is a high-net-worth individual who lends money in exchange for a share of the company’s ownership. Angel investors are more inclined to contribute substantial sums of money when they identify a startup they want to invest in. Typically, this financing option occurs in a company’s early stages of growth, with some investors expecting up to 30% equity.
If You Have Good Cash Flow, You Can Get Invoice Financing
Slow invoice payments are one issue that frequently plagues startup companies, especially those that engage with corporate clients. Most corporate clients, particularly big companies, make payments within 30 to 90 days. However, many startups cannot wait four to eight weeks for payment because they need money to fund their expenditures. Therefore, invoice financing is one quick way to generate funds when a company is low on cash and has many unpaid invoices. It occurs when a company borrows money from a finance business using its invoices as security. Invoice financing is comparable to a standard secured loan because it has specified payment terms and accrues interest on unpaid balances.
Apply for Grants
Grants are alternative means for securing short-term funding. Grants are essentially financial assistance given to a person, non-profit, corporation, or business from Governments, private businesses, or even corporations.
So many companies, non-profit organizations, and government agencies provide funding to small business owners in the form of a small business grant. The best part about grants is that there is no collateral, and they don’t require repayment.
Thus, if your runway is short as a startup founder, explore as many grants your business may be eligible for and apply for them. This may give you the additional time to take your business off the ground and sign even larger cheque sizes.
Consider Being Acquired or Bought
This is usually the last resort when things are going poorly, and you have done everything to stay afloat. Essentially, there are three ways to get acquired. Either by a larger company, private equity, or a new investment round where an investor or group investors buy out all the current owners and investors. For an acquisition to be successful, you have to identify your position or strength, which is the reason why anyone should buy your business. This could involve exclusive agreements, innovative technology, and world-class talent.
Tap into your social network
Another viable option is to explore your network for solutions. This could be in the form of short-term funding like loans or investments. Either way, your network is the first place to start. Individuals in your network may be able to help with useful referrals and offer advice that can help point you in the right direction, which will hopefully lead to a solution.
Merge with another startup
If you are unable to raise short-term funding, raise capital, and have no intention of being bought out by investors or by a competitor, the next best option is a merger. Explore your strengths and make propositions to competitors on the possibility of coming together to form a single entity. The good part is that your business gets to live another day, and you also get to expand the company.
Conclusion
Managing a startup is in many ways similar to the job of the captain of a ship. Your chances of surviving hard times are higher when everyone is calm. The runway might be short, but the best thing to do is find solutions before your coffers run dry. Cash flow is the lifeblood of your small business. Thus, as long as there are funds in the bank account, no matter how little, there might still be a chance to save the business. Inform your investors, rally your people, motivate your team, and stand firm till the storm is over.