As a startup, cash is everything. The longer you can make it last, the better. Yet we come across many startups that seem to manage cash flow by the seat of their pants. The result can be tumultuous, with startups running dangerously low on cash, forcing founders to go without pay, dip into their personal savings or draw against their personal credit cards.
Here are some ideas on how to manage your company’s cash more wisely.
Know and understand where your cash goes every day
A good way to start is by keeping your books organized to get a sense of whether or not your company is hitting its financial plan. A critical part of that is to keep the books current. It’s best to reconcile them every day if you can.
Regardless, good record-keeping isn’t just about keeping chaos at bay. Messy and unmanaged books will not reflect well on your business savvy when potential investors begin to perform due diligence on your startup.
Use credit cards — responsibly
Credit cards have become a popular and powerful tool in managing startup cash flow. But before applying for any old card, consider your own commercial bank and their credit card options. “Find and establish a relationship with the right banker,” states Michael Rash, CEO at MCDA CCG, Inc. Once they get to know you, they are often more willing to help you now and down the line if, for instance, you are running low on cash.
As a founder, it’s natural to put the company’s first credit card in your name, but make sure you read and understand the fine print. Some cards require personal guarantees from the holder. As a result, you may be liable for unpaid charges, rack up late fees and face personal credit rating hits. You’ll be better off with a card that doesn’t require personal guarantees so you won’t face such risks.
Establish Spending Habits and Guidelines
Once you have a credit card and bank account established, decide who gets what access and privileges. Establish a “spend culture” that lays out rules for card and check use and strict consequences for breaking them. Measures like having a primary administrator, requiring dual authorization for certain expenses and having separate accounts for payables and receivables can help mitigate 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. Make sure your cards include travel benefits, purchase protection and fraud protection.
Without such discipline, accounting and tax preparation will turn into a headache. You don’t want to be in a position of figuring out who spent what and whether a purchase was a business expense or not.
Pay late, bill early
Credit cards, of course, are great cash management tools that allow you to postpone payments. You can pay in July or even August for an expense — say, your internet bill — you incurred in June at no extra cost, if you pay your balance in full. You can achieve great results by negotiating payment terms, for example, 10% cash up front, then Net 30 or even Net 60 on the balance — with your vendors. You should also be leveraging the “free” version of the countless “freemium” services that can help you run your business, Dropbox, G Suite and SurveyMonkey to name a few.
The flip side of late payments are early invoices. 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 $200 a month, consider charging just $2,000 a year for those who pay upfront, so the cash gets in the door quickly.
Revenue All Day
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 we find that many startups seek to entice new customers with free trials.
That simply will not put cash in the bank.
And since anyone may try something that’s free, it won’t give you an indication as to whether your product will actually sell in the market.
A smarter approach is to charge customers a small fee to take part in a trial and offer them a significant discount if they end up purchasing at the end of a trial period. 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.
Of course, if you can manage to have customers pay in full, you’re much better off.
What Is Too Low?
There’s another critical benefit to keeping your books in order: it will give a clear view into how much runway you have. 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? Mr. Rash says the main frame of reference to answer that question is your employees. They’re your startup’s top expense, and its biggest asset. So look at it in terms of payroll. When you have six months’ worth of payroll, you should be talking to investors, Rash says. And dipping below half of that is likely very irresponsible. “You need to have three months of payroll, at minimum, set aside,” Rash says. That’s in part because executives and board members have a fiduciary responsibility to cover payroll if there’s the potential that you will need to do layoffs or shut down altogether.
Keep in mind, as we stated earlier, that’s when that good relationship you have established with your bank may translate into a loan to keep you going.
Caveats in Outsourcing
The reality of startup life is that many founding teams don’t have the time or wherewithal to deal with day-to-day cash management. Fortunately, there’s a long list of services that can help you. They range from basic bookkeepers to fractional or full service CFO’s.
While both are extremely useful it’s important to understand their shortcomings. Founders will get basic bookkeepers to manage some basic accounting and will later hire a consulting CFO to do business plans or other more complex projects. When doing so, founders must ensure that both professionals really understand what the business does and explain how they can help. At MCDA CCG, our finance consultants work together to fully understand each business, to provide the best service possible.
Cash Is Your Lifeline; Manage It As Such
As you operate at full speed to get your startup going, don’t make the critical mistake of treating cash flow as an afterthought. Developing and maintaining clean books, strong banking relationships, sensible checks and balances and wise spending habits may seem like a distraction. But adopting discipline now will help extend your runway and bolster your chances of success especially with investment groups.
While developing strong and healthy financial habits is imperative to fuel your business growth, how you choose to tackle it determines the scale of your success. What we mean by this: ensure that you’re making the most out of your time and energy by trusting experienced resources.
For example, when you’re looking to build wealth, you wouldn’t ask someone who is broke.
At MCDA CCG, our business experts excel in delivering flexible financial outsourcing functions to meet the unique needs of differing startups. Whether you’re looking for CFO services on a flexible part time basis, guided direction in polishing financials for investment, critical tax advisory, and more, our team of professionals provide effective solutions at cost-competitive prices. Learn more by scheduling a free, no obligation call with us today at (657) 258 – 0577.