Entrepreneurs and startup owners can mistakenly think that their success is determined by the quality of their product or service.
Unfortunately, even a company that produces the greatest product and service in the world can go bankrupt if they fail to manage their cash flow successfully.
According to one study by US Bank, 82% of all business failures are attributed to poor cash flow management.
All new business owners, need understand the basics of budgeting and cash flow management as well as the other fundamentals that keep a business alive and thriving.
1. Secure A Contingency Fund
There are two types of costs that you are going to incur while running a business fixed and variable expenses.
Rent, payroll utilities, subscriptions, loan repayments are common fixed expenses for new businesses. There must always be enough cash flow to cover these expenses.
For example you can’t tell your employees to wait an extra couple of weeks for their paycheck because you don’t have the money in the bank. It doesn’t matter whether or not you have a $1 million check on its way.
Prioritize Spend On High ROI Marketing
Marketing requires investment. It’s easy to burn through a sizeable marketing budget when you don’t know what you’re doing. Some marketing strategies are more profitable than others, however, you need to work out where your audience is when they are online.
Identify the marketing channels and strategies with the highest ROI with your audience so your business gets a higher return on its investment.
A drop shipping company might sell hundreds of products but find that only five of them are in high demand. The business could spend tens or hundreds of thousands of dollars on Google Adwords advertising to test every product in their funnel. Or do the research and allocate more of their budget to promoting a product that is in demand and profitable.
Avoid Growing Too Quickly
Did you know that startups that grow too quickly are more likely to fail?
Growing slowly gives the business time in increase revenue faster than the increase in expenses. Many businesses, unfortunately, get too overly confident with their success. They start pursuing customers in new regions or demographics. The problem is that they might be increasing their revenue, but they are also increasing their expenses at a faster rate.
Don’t be discouraged if your business is growing slowly. It is better to accumulate revenue and build up your cash reserve first. You will expand later once you have enough money in the bank.