Finance Tips for Business Start-Ups

Written by Allison Shirreffs Tuesday, December 29 2009

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In the aftermath of last year’s financial meltdown, hoarding cash became business as usual. General Electric Co. holds upwards of $48 billion in cash, and, as of October 2009, The Coca-Cola Co. held nearly $9 billion in cash ‒ more than double what was in its coffers at the start of the year.

Reduced consumer demand and the tightening of credit markets have forced corporations looking to finance growth “to be their own banks,” says early stage investor and entrepreneur Greg Foster. But it’s not just the big guys accumulating cash. Those who run small and mid-sized businesses are rethinking how they run their operations.

Foster, formerly an executive with Turner Broadcasting System Inc., works with several technology start-ups. He’s seeing more small business founders pay themselves “just enough to get by” so they can sink left over cash back into their businesses. Those start-ups fortunate enough to have raised venture-backed capital are doing “a lot more with a lot less,” adds Foster. “It’s less to do with accumulating cash than it is to do with the preservation of cash.”

How best to preserve cash? Most often, business leaders study line items and cut where they can. Upgrade computers? Hire an employee or let one go? “These are tough choices,” Foster says. “But if the business is losing money, it helps to think in terms of ‘months of burn.’”

Cutting costs helps, but businesses often overlook the revenue-generating side of the business. Extending a business’s payables window ‒ asking for 60 days rather than 30 days ‒ or spacing out the company’s due dates with vendors can mean more cash on hand. So can billing right away and offering discount deals to clients and customers who pay quickly or up front. Cutting prices can lead to an increase in sales, and paying attention to how cash flows in and out of the business helps identify areas that need tweaking.

“A lot of entrepreneurs don’t think about these things,” says Foster. “Look at revenue first and then costs. It’s common for small business owners to overestimate the money they’ll bring in and underestimate the cash they’ll need to run the business.

Megha Rodriguez, owner, Hire Humanity, LLC, a virtual business management and administrative services company based in Atlanta, meets entrepreneurs who think they need to spend thousands of dollars putting together the “perfect” business cards, marketing plans, websites, and the like.

“When they’re done doing all that they don’t have enough cash to operate the business,” says Rodriguez. “I’ve seen entrepreneurs who’ve had to shutter their doors when the only difference between me and them is that I conserve cash.”