It’s a sad statistic, but nine of ten startups fail. Many fail because they don’t do a good enough job at cash management and run out of money. Some of these companies, funded by Venture Capital, spend that money like there is no end to it. Many others are bootstrapping their way to success. In either case, cash management is the holy grail of business. As Alan Shugart, the founder of Seagate, a disk drive manufacturer once said, ”cash is more important than your mother”.
Cash management terms
Here are some common terms and their definitions.
- Payables. The cash you pay out to run your business.
- Receivables. Income from the sale of goods or services.
- Cash Flow. Money that comes into and flows out of your business.
- Liquidity. How easily can you convert your assets to cash?
- Runway. The amount of time you have until you run out of cash.
- Burn Rate. The amount of cash your company spends monthly before generating income from operations.
For the purpose of this post, I’ll group startups into two types: Funded and Bootstrapped. Funded companies have investors. Venture Capital, Angel Investors, etc. Bootstrapped companies are those that are funding growth from income generated by the company.
The cash management scenarios are quite different for each segment.
For funded companies the biggest problem is often the perception that there is a never ending source of funding. These companies tend to overspend on things like staffing, office space and marketing. When that big check appears in the company checking account it’s tempting to immediately start spending.
Some will build a marketing department before there is a product to market. They look at Facebook and Google and think they need a flashy office with Foosball tables and cafeterias when a much simpler space will do just fine. And in today’s market the concept of a fully virtual business is a very real possibility.
Funded companies should focus on getting their MVP built and into the hands of customers before they scale up a full marketing team. Then focus on sales, the one thing that every company needs. There will be plenty of time to get a marketing team in place once you have a product and some customers.
The challenges for bootstrapped companies are quite different. I worked at a company where our goal was to operate as close to cash-flow break even as possible. This meant we re-invested as much as we could and still kept everything moving. This was a tricky balancing act and we managed to walk that tightrope until we were acquired.
Conserving our cash was a primary consideration in every decision we made. We weighed every hiring decision carefully and made sure that each new hire would add to the bottom line and justify the added expense. Our main focus was increasing sales as that was the only way we were going to grow.
Cash Management tips
- Control your spending
- Build a cash reserve
- Collect receivables as quickly as possible
- Hire carefully
- Prioritize spending
- Focus on cash flow not profits
- Use technology
Let’s look a little deeper into these tips. The first and most important thing to do is to control your spending. Before any expense is approved, analyze its effect on your cash flow. Can this expense be put off to a later time. Will it benefit our cash flow?
Life and business are unpredictable. You should have a couple of months cash in reserve that will allow you to weather any short term downturn and allow you to remain focused on growing sales.
Collecting what is owed to you as quickly as possible will help you ensure a steady cash flow. Allowing customers to delay payment is a terrible idea unless you are a bank. Make your invoices “due on receipt” and use automation to speed up collection.
Your staff is your biggest expense. Before you add another head, stop and make sure that hiring that person will improve your cash flow. Either through increasing sales or getting a product to market faster. Resist adding staff for a need that is yet to develop.
Eliminating expenses for things that are nice to have will go a long way toward a positive cash flow. Resist things like a posh office with all the bells and whistles. Would a virtual office work better for both you and your employees? Will those free lunches and Foosball tables enhance your cash flow?
Profit in business is revenue minus expenses. Selling your product or service generates revenue. Collecting the money for that product or service generates cash flow. This points back to point 3. Do everything you can to get paid as quickly as possible to improve your cash flow.
And lastly, make use of technology. A simple spreadsheet will allow you to track your cash, but it’s not the best solution. An automated invoice/payment system can speed up both billing and collection. Additionally these systems will provide you with detailed tracking and reporting at any time to better manage your cash flow.
Cash is king. It’s the very lifeblood of your business. Understanding how to manage it is the single most important thing you, as a founder, can do.
Where do you need help managing your cash flow? Book a no-obligation consultation and we can discuss how I may be able to help you better manage your cash.