Be Smart about Containing Costs, and Dynamite the Dam on Your Cash Flow

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It should go without saying that cost controls are essential to any business, especially the typically cash-strapped startup. But it needs to be said, and explained.

Even those new business owners who know they have to keep costs in line don't always know how to go about it. Their "burn rate" spirals out of control—and you know how that ends.

Knowing your cash flow status at all times, keeping it well managed, and using good cost containment practices not only allows you to forecast when you'll break even—or become profitable—but also when you'll need new investment or a loan, and clearly demonstrate to potential backers what you're doing and why you need a transfusion of new green.

It should be standard practice to review your cash status every month, just as it's done in any well-run household. "It's no different for a company than it is for an individual: How much do I make a month, and how long is it until payday?" says David Brophy, a venture capital professor the University of Michigan. "It's as old as dirt—and as fundamental."

And also, using the same comparison to running your personal finances, when more money is going out than coming in, it's no time for frivolity or unnecessary expenses. Get cold-blooded about containing your business costs, and put your imagination to work.

A List of Cost Containment Tips to Get you Started

Because you can't spontaneously decide when revenue is going to come in, keeping a tight rein on costs becomes even more crucial. Review your cash flow situation every month—but take a hard look at costs every day.

There are almost always places where you can tighten the leash without crimping operations. It's a great place to flex your creative muscles, and invite your managers and staff to do the same. Here are some starters:

• Think about outsourcing everything you can, from accounting and marketing to managing customer relations.

• You may already have found a great deal on office space, but don't stop there. Wheedle the landlord for free use of any office furniture, phones or other equipment that's already in place.

• Don't pop for new office fixtures and furniture when you really need the cash for new inventory.

• In the short term, hiring new salespeople should come before taking on a financial manager. Bringing in revenue takes priority over any costs that aren't absolutely necessary.

• Don't give your customers weeks or months to pay for your products or services. At least ask for a deposit up front—a great way to jump-start your cash flow.

• Sign up for a merchant account to handle credit-card processing, and encourage your customers to use it. You'll pay a fee for the service, but credit cards can't be beat for revving up cash flow.

• Comparison shop when you're ready for a business card. Some providers, like StartupNation sponsor Discover Business Card, cater specifically to small business and offer useful options like employee cards with customizable limits and monthly reports on their spending.

• Don't pay your own bills late, but don't pay early either. Paying right on time keeps vendors happy, and helps you control cash flow and costs.

• Closely manage your receivables, call overdue accounts quickly—putting the largest amounts first—and ask if there's anything you can do to speed up payment. You might offer a discount on overdue receivables, but only after you've pushed for full payment without results.

• When sending invoices, use e-mail instead of snail mail. Electronically sending a PDF of your invoice can save a lot of time and, of course, the cost of postage. Just check with your customers first to be sure they're OK with it.

That should get you going on controlling costs, working lean and mean, and dynamiting the dam on your cash flow. Just remember, cost containment has a beginning but no end. Use your imagination, marshal your employees behind the effort and watch your balance sheet tip to the good side.

By: Rich and Jeff Sloan