Focus on cash flow for the smart startup

Founders are people with big ideas. They have the drive and ambition to disrupt an industry with new products or services. They also have the guts to bring their ideas to life, often becoming serial entrepreneurs. With their sights set on the big picture, the day-to-day administrative tasks like keeping close track of the cash flowing in and out of the business can sometimes get overlooked.

In fact, most startups that fail, do so because they run out of cash. That’s why we have put together some tactical tips to help founders navigate cash flow and get the most out of their funding.

No one said it would be easy

More and more companies are springing up as a result of the pandemic, as entrepreneurs seek opportunity around the changing needs of society and businesses. However, running a startup is not all about big ideas. While product or service development and sales are critical, the administrative side of business management is just as important. And cash flow is one of the top issues to prioritise.

In particular, late payments present a major cash flow issue for UK startups. One of the biggest mistakes a startup can make is to assume that their customers can pay, and will pay, on the terms they agree. Late invoice payments can sometimes lead to cash flow issues, which can prevent growth or even threaten the existence of a small business.

Research from the Asset Based Finance Association (ABFA) found that seven out of ten small business owners cite cash flow problems as the biggest threat to their company, with late payment being one of the most common causes. So what can be done?

Take a proactive approach to cash flow management

As a startup, cash is your lifeblood. The longer you can make it last, the better. Yet we see many startups that seem to manage cash flow ‘by the seat of their pants’. The result can be chaotic, with startups running dangerously low on funds, forcing founders to go without pay, dip into their savings or draw on their credit cards.

Here are some ideas on how to manage your company’s cash more wisely:

Know where your cash goes every day

A good way to start is keeping your books organised, in order to get a sense of whether your company is hitting its financial plan. A critical part of that is to keep the books current — reconcile them as often as you can, preferably every day.

Consistent record record-keeping isn’t just about keeping chaos at bay. Messy books will not reflect well on your business when potential investors begin to do due diligence on your start-up; poor bookkeeping could also impact your chances of securing funding.

A Bank that suits you

A business bank that understands you, and the startup mentality, may prove to be a huge leg-up when it comes to cash-flow problems. There are plenty of startup specific banks that provide an alternative to the established high street lenders.

There are some differences in terms of account features, benefits, and costs. Startup business banking accounts generally offer better incentives than accounts designed for an established business. Many banks charge no fees for an initial period as a way to support a business in its early stages.

There are also benefits designed to help get your business off the ground, such as business advice and access to a network of founders and VCs.

Establish spending habits and rules

Once you have a bank account, decide who gets what access and privileges. Establish a “spend culture” that lays out rules for spending — and consequences for breaking them. Measures like having a primary administrator, requiring dual authorisation for certain expenses, and having separate accounts for payables and receivables can help prevent fraud.

Require receipts from vendors and employees. Consider routing credit card points into one account so you can easily use them where you need them most.

Without such discipline, accounting and tax preparation can become complicated. You don’t want to be in a position of figuring out who spent what and whether a purchase was a legitimate business expense.

Pay late, bill early

If there are ways to potentially defer payment by a month or two, this can be a helpful way of spreading the costs of some business expenses. You can achieve similar results by negotiating payment terms with your vendors. For example, you could offer 10% cash up front, then net-30 or even net-60 days on the balance. And of course, lean heavily on the countless “freemium” services that can help you run your business, from Asana to Dropbox, G Suite, and SurveyMonkey.

The flip side of late payments are early invoices — so bill your customers as soon as you can. For a subscription business, a good way to accelerate cash flow is by offering deals. If your product costs £100 a month, consider charging just £1,000 a year for those who pay upfront, so you get secured cash in the door - fast.

Revenue, revenue, revenue

Founders understand that getting customers to pay for their product is the best way to ensure they don’t run out of cash. And yet, many startups seek to entice new customers with free trials. That won’t put cash in the bank. And since anyone may try something free, it won’t give you an indication as to whether your product will sell in the market you’re targeting.

If they’re willing to pay, it’s usually a sign that you have a good product. It’s also likely to be an important validation point for prospective investors.

How low is too low?

There’s another critical benefit to keeping your books in order: it will give a clear view of how much runway you have. You can use that knowledge to overlay milestones — time to a minimum viable product, time for piloting test with customers, time to fundraise — and get a sense of where you stand.

As you go through that process while your startup burns cash, you’ll be faced with a key question: how low should you go? The frame of reference to answer that question is your employees. They are your startup’s top expense and its biggest asset. So think about it in terms of payroll. When you have six months' worth of payroll, you may want to talk to investors. And remember, that’s when that good relationship you have established with your bank may translate into a loan to keep you going.

Be mindful of the caveats in outsourcing

The reality of startup life is that many founding teams don’t have the time to deal with day-to-day cash management. Fortunately, there’s a long list of services that can help you. They range from bookkeepers to outsourced CFOs.

But it’s also important to understand their shortcomings. Basic bookkeepers or consulting CFOs may not fully understand your business plan, for example. If that’s the case, they can’t accurately reflect your business. Founders must make sure their outsourced accountants really understand what the business does and explain how they will help.

Seek government help

Running a business can be tough but running one during a pandemic can be a challenge to end all challenges. There are many startup grants and incentives available to new businesses, with specific measures added during the pandemic to help businesses stay afloat.

Smart cash management boosts your chances of success

As you focus on getting your startup off the ground it is easy to treat cash management as an afterthought. But taking your eye off the flow of funds in and out of your business exposes you to serious risk and causes many businesses to go under. Cash flow needs to be a core focus, whether you manage this yourself or through an outsourced accountant or CFO. Discipline at the outset will help extend your runway and boost your chances of surviving and thriving.