Capital is oxygen for early-stage businesses so managing cash flow needs to be a priority for every founder. As a start-up scales, it’s the cash flow that is most important, which is why most investors will always ask you for your monthly net cash burn (i.e.the difference between cash out and cash in).
Not all business models are created equal. Some businesses benefit from customers paying fees upfront, so they generate cash upfront, while others need to pay when they order goods, which means it could be months before those goods are converted back into cash. You don’t need to be an accountant, but the most successful founders are always on top of how cash is moving through the business, both coming in and going out.
Here are 3 simple tips for any founder as they look to get on top of their cash flow. Watch the full video here:
I would encourage founders to invest early in a dedicated financial controller who is focused on managing the books. Cash flow challenges vary greatly from one business model to another and founders tend to have so many balls in the air at any point in time, they need someone dedicated to managing the money. There is a huge opportunity to gain a strategic advantage if you get it right and an equally large penalty to pay if you get it wrong.
In the early days of a business, founders are still finding their way and often prefer to keep things loose as they focus on growth. However, even in the early stages of a business it is critical that you establish clear rules around who can spend money. For example, what expenses can be claimed and who approves claims, or who can use a company credit card, and for what type of purchases. Small decisions that can become embedded with culture. It’s better to start off on the right foot and establish guidelines early on. In hindsight, you will thank yourself if you did.
At any boardroom meeting people gravitate to the P&L. How fast are we growing on the top line? How are we against our revenue and opex budget? However, at Jungle we also spend as much time on the cash flow projections. This not only forces you to scrutinise how much you really need to run the business, but it also encourages you to look for other ways you could fund operational costs aside from equity. For example you could explore options like venture debt, notes, lines of credit or revolvers.
Once an investor puts in their capital, then everyone is on the same side of the table as it relates to capital utilisation or burn rates, as that has a direct bearing on dilution. Part of the equation is improving margins, but making the most of the capital you have is absolutely critical. The more efficient a company can run, the more money every can make, because dilution is less.
Cash is king, so make the most of what you have. In early-stage companies, you’re typically not surrounded by investors who are scrutinizing your financial statements or helping you to be more efficient. So early-stage founders need to hire someone who can help look after the most precious asset, the capital. As a result, there couldn’t be a more important topic for you to raise, within the leadership team or with your investor, than cash flow.