Fraud and poor management of cash flows pose a bigger threat to most startups than banking failures (fingers crossed, let’s hope there isn’t another banking crisis!). Effective cash management involves several critical steps to ensure financial stability, minimize fraud risks, building scalable process that the entire team can follow, and support sustainable growth:
- Monitor Cash Inflows and Outflows: Regularly track all cash movements, including revenue from sales, investment funds, and other income sources, as well as expenses like payroll, rent, and utilities. We recommend founders should review their company’s bank and credit card statements regularly. In fact, we wrote an entire article on how to review a bank statement for founders!
- Control Expenses: Implement an expense policy to avoid unnecessary spending and help the team understand what they can spend on and what requires approval (and what’s totally out of the question). This includes negotiating favorable terms with suppliers, cutting non-essential costs, and regularly reviewing and optimizing operational expenses.
- Maintain a Cash Flow Forecast: Create and update a cash flow forecast to anticipate future cash needs and prevent shortfalls. This helps in planning for upcoming expenses and ensuring there is enough liquidity to cover them. We can’t emphasize enough that the best founders have financial models and projections that they use to control their company’s burn and cash position, and to measure their progress against their goals. Read our article to get our free model templates and learn how to build a financial model.
- Implement Efficient Billing and Collections: Ensure timely invoicing and follow up on outstanding payments to maintain steady cash inflows. Offer multiple payment options and incentives for early payments to improve cash collection. Your customers are the best source of cash, but you need to actually go through the effort to collect from them to get paid in many cases!
- Use Technology for Automation: Utilize accounting software and tools to automate cash management processes. This can reduce errors, save time, and provide real-time insights into your cash position.
- Use Modern Corporate Cards: New tools like Brex and Ramp allow for nuanced expense management and spend limits. There is no excuse to not provision virtual credit cards for employees with set spending limits. This helps in controlling expenses and minimizing the risk of fraud. Read our list of the best credit cards for startups to see which ones make the most sense for you.
- Use Expense Management Software: Implement an expense management software that provides a clear and automated approval workflow. This ensures that all expenses are properly documented and approved by the appropriate personnel. Note that many of the cards that we recommend can double for an expense management system.
- Set Up an Approval Workflow: Establish a rock-solid approval workflow within your expense management system or corporate card solution. This helps in maintaining a clear paper trail and ensures that all expenses are reviewed and approved systematically. It also helps employees understand who to go to if they have questions about something that they want to purchase for the business.
- Automate Reimbursements: Use payroll systems that automate recurring reimbursements to employees. This reduces the need for manual expense reports and minimizes the risk of fraudulent claims. Again, the card solutions that we like can do this.
- Separate Personal and Business Expenses: Make a clear distinction between personal and business expenses from day one. This helps in maintaining clean financial records and reduces the risk of fraudulent claims. This is incredibly important for VC-backed companies.
- Track Every Expense: Ensure that every individual expense is tracked and categorized. This helps in spotting irregularities and potential fraudulent activities.
- Reconcile Regularly: Regularly reconcile bank statements and credit card transactions with your corporate books. This helps in identifying any discrepancies and potential fraud early on. The best accountants will handle this for you.
- Understand Shutdown Cash Needs: Ok, this one is a bit depressing, but founders have legal obligations that must be met. Determine the amount of cash required to shut down the business, including meeting all payroll obligations. Failure to meet payroll can result in legal liability for founders and directors, making it crucial to plan for this scenario.
By focusing on these strategies, startups can manage their cash effectively, helping stay financially stable, minimizing fraud risks, and supporting sustainable growth.
