Anyone who wants to start their own business must juggle many different roles simultaneously. Founders are typically not only responsible for managing directors and marketing and sales, but also for the financial aspects of the new venture. Particular attention is paid to liquidity, which ensures that the company remains solvent to creditors and that outstanding liabilities can be settled in the long term. In this article, we’ll show you how liquidity management works when starting a business and how you can keep your cash flow under control with seven simple tips.
Create a realistic liquidity plan
As an essential component of the business plan, founders should also pay particular attention to a realistic liquidity plan. The liquidity plan highlights and compares expected income and expenses. Such a plan can be particularly crucial for young companies seeking start-up grants or loans. This is the first important step for effective liquidity management when starting a business.
Nevertheless, the figures forecast therein should not be overly optimistic. Young entrepreneurs are easily tempted to see their financial future without risks and pitfalls. However, this can have far-reaching consequences in the medium to long term, which can significantly hinder the company’s further development.
To create a realistic liquidity plan, you should follow these tips when starting your business:
- Take enough time to plan
- Obtain feedback from different departments, if already available
- Use sufficient data instead of a rough gut feeling
- Use a suitable tool for liquidity forecasting
Pay bills promptly
Paying outstanding invoices as quickly as possible is a classic tool for making a company’s liquidity more predictable.
Of course, the expenditure will worsen short-term cash flow, but management knows exactly what the company’s current financial situation is.
Those who postpone invoices too far into the future run the risk of losing track. This leads to cash flow being misjudged or overestimated, and new expenses being approved. At a later date, the company is then faced with a cumulative avalanche of costs, which, depending on the amount of deferred invoice payments, can potentially lead to financial hardship.
Many companies also offer discounts if you pay your invoices promptly. These reduced costs, in turn, have a positive impact on your cash flow. In the following section, you’ll learn how to apply this method in reverse for your own business.
Offer discounts for quick payments
You can also take advantage of the discount on quick payments mentioned above (often in the form of cash discounts) to improve your company’s cash flow.
According to the time value of money, money available today is more valuable than money accessible in the future. This is because immediately available funds can be reinvested and, in the best case scenario, generate profits tomorrow. This is essential for rapid growth and sustainable competitiveness, especially during the start-up phase.
So offer your customers discounts such as cash discounts on quickly paid invoices to benefit from the following advantages:
- Sales are realized faster
- Customers have an incentive to pay, which may reduce payment defaults
- Your liquidity will be improved in the short term and more predictable in the medium to long term
- Quickly realized sales can be reinvested promptly
A typical discount rate is between 2 and 3 percent. You can then offset this as a discount against the regular invoice amount.
Good to know: It’s important to understand that a time-based price discount is referred to as a cash discount. The more familiar term “rebate,” on the other hand, refers to quantity discounts (which can also be an effective means of increasing your liquidity under certain circumstances).
Accounting program for seamless document recording
The fourth tip also relates to the overview that founders should have of all their income and expenses at all times. The basis for this: receipts that clearly show the time, amount, and customer contact of each order.
Especially during the start-up phase, entrepreneurs have to manage many tasks simultaneously. These often involve a high level of bureaucracy and organizational effort. Nevertheless, incoming and outgoing invoices should always be kept in order.
Accounting software offers an ideal solution for keeping track of all relevant documents. With them, you can, among other things:
- Send outgoing invoices automatically
- Have incoming invoices paid automatically
- Scan and digitally filter and manage receipts
- Submit your tax return more easily and quickly
All of these benefits mean you save time and effort, access outstanding receivables more quickly, and settle outstanding liabilities promptly. Ultimately, this translates into more precise liquidity planning and improved cash flow.
Professional dunning and debt collection
Discounts may not always be enough to prompt payment. If an invoice remains unpaid by the due date and reminders prove ineffective, it’s time to start the dunning process.
It’s important to adhere to certain rules and etiquette to ensure a professional dunning process that doesn’t scare off late-paying customers. After all, no company wants to upset and lose its customers despite overdue payments.
Especially for young companies that are still in the start-up phase, this topic involves many uncertainties and requires special sensitivity.
Reminder levels
If a customer doesn’t pay your invoice, you’ll receive the first reminder. This is also known as a payment notice. If you haven’t received a response within 14 days, you can initiate the second reminder stage, which is usually a more stringent request for payment. The third reminder, which can threaten legal action, is often the last resort in the dunning process.
Reminder fees
There are no legal guidelines for determining reminder fees. Generally, the amount of the fee depends on whether the customer is a private individual or a business. Private individuals may not be charged any fees for the first reminder. Only in the second reminder stage may you charge fees of $2 to $5. The fees are usually increased for the third reminder stage. For business customers, a flat-rate reminder fee of $40 is legally permissible.
Debt collection as a final solution
As soon as young companies reach their limits with their dunning process, they can hire a professional debt collection agency.
In finance, debt collection refers to the collection of outstanding debts, and debt collection companies are employed by companies to collect these amounts through expertise and professional competence.
If customers do not pay the outstanding debt after receiving a writ of execution, the debt collection company will initiate legal enforcement measures.
Of course, engaging debt collection agencies entails additional costs for companies in the start-up phase, but this step should not be avoided as a last resort in order to collect outstanding amounts, secure liquidity and, last but not least, send a clear signal to future customers.
Arrange Installment Payments During Cash Flow Bottlenecks
Everyone knows the saying: If you want to make money, you have to spend money. And this is often especially true during the start-up phase; raw materials have to be ordered, tools implemented, and the first employees paid. But when your company is still in its infancy and large investments and expenses have already been made, financial bottlenecks can quickly arise, which also worsen the company’s cash flow.
The magic word: installment payments. Whenever you’re in a financial tight spot and can pay off costs in several small installments, you should take advantage of this opportunity to keep your cash flow at a reasonable level.
If this option is not explicitly offered in advance, you should inquire with suppliers and other providers about payment in installments – as we all know, people who talk get help.
Ensure liquidity management is up to date
To make informed decisions about your company’s future direction, you must always be able to rely on current figures. This naturally also applies to liquidity management.
With suitable software and real-time liquidity management, you are always on the safe side and only use the most up-to-date data to calculate your cash flow.
Software-supported liquidity management offers you various advantages over planning in Excel & Co.:
- Time savings by reducing manual work
- Error reduction and timeliness through automated processes
- Link to bank accounts and thus planning in real time
Conclusion:
Many company founders neglect liquidity planning amidst all their other tasks. However, those who address their cash flow early on can maintain a sustainable market presence and steer their company toward a successful future.
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