How do you manage your cash flow at the start of a young company?

Fri, 18.12.2020, 00:00

Having the best entrepreneurial idea, brilliantly succeeding in raising funds, benefiting from a successful client base are important elements for starting a startup but insufficient to make your business viable. Indeed, if you manage your cash flow poorly, your business may sooner or later close, even if it is profitable! To help you with a new cash flow, here are some examples of aspects to consider.

The cash flow statement

Cash is the money that is available to the company, whether it is in the cash register or in the bank account. If there is no more cash, the company's business cannot continue because it will not be able to meet its deadlines and payments. Control of the source and use of cash is then done through a cash flow plan, an essential tool for the financial management of the company.
From the start of the business, it is necessary to get into the habit of keeping a detailed monthly cash flow statement. The purpose of this financial document is to visualize your past and present cash flows and to make future forecasts. Indeed, the cash flow forecast gives you an overall view of the coming months and enables you to anticipate if there is a shortage of cash, for example. In this table, you enter cash receipts and disbursements, i.e. cash inflows (such as turnover, VAT included, planned sales, capital contributions) and cash outflows (such as purchases, rent, salaries, telephone and miscellaneous charges, insurance, investments, taxes). Software and online templates are available to help you if you have difficulty with the figures. Good cash management then means monitoring which must be balanced as well as possible with ensuring that cash receipts can cover expenses.
 

The art of managing a startup's cash flow

Mistakes not to be made:
 

1. Putting net cash in the shadow of profitability.
   Consider Wonga, an English lending company that provided a high interest short term loan. The company managed to make a profit in the beginning, but it turned out that many customers were having trouble repaying their loans. The company's managers admitted that they did not choose customers carefully and did not have enough control over unpaid customer invoices to be able to reduce them. As a result, their focus on profits and their neglect of transforming accounts receivable into cash only brought them long-term problems. In general, the longer customers delay the payment of their debts, the less likely it is that the company's receivables will be recovered, which is why profitability does not necessarily guarantee a net cash position.
    
2. Managing fixed cash in an inefficient manner.
   Poorly controlled stock rotation leads to the risk of loss or deterioration, and consequently to an increase in short-term financing needs. Nike is a company that obviously has a large number of goods, but they have found it difficult to track their performance. As a result, the company lost $100M in the early 2000s.
    
3. Not keeping an eye on spending.
   Engaging in frenzied spending when the startup is booming and growing exponentially can hurt. This was one of the reasons for the collapse of the company Save, an expert in the repair of smartphones and electronic devices. Three years after the opening of the first shop in France, Save will achieve international fame in 2015 with subsidiaries in Europe, 500 employees and a successful fundraising campaign. However, one year later, an excessive consumption of cash per month makes the company unable to pay its debts. It then has to apply for bankruptcy.
    
4. Not staying down to earth and let yourself be carried away by the madness of grandeur.
   Yes, you have to believe in your business and be optimistic about sales, but sometimes you tend to have your eyes bigger than your stomach and not be realistic enough in your predictions. The case of the Geneva startup Jamathi Diary illustrates this point. Jamathi Diary was a notebook that combined diary and diary. After its great success at Fnac and Payot, five times as many copies were quickly ordered from its supplier. Unfortunately, sales did not follow as expected and the startup found itself in debt, forced to end this project.

 
Tips for success:
 

1. Continuous liquidity planning.
   Monitoring regular cash flow enables you to better project yourself in the short term and anticipate possible moments of financial difficulty. In this way, the reasons for the problem can be detected more easily and remedied as quickly as possible. This is one of the keys to the success of the startup Farmy, an online food market that has not underestimated this aspect. Indeed, they have been able to translate their growth strategy into their financing plan by anticipating increases in financial inflows resulting from the growth of their customer base and by protecting themselves from a potential increase in variable costs by choosing to purchase mainly from local producers and farmers.
    
2. Plan a minimum and maximum sustainable budget.
   Before attracting investors, the managers of an emerging business must plan for the best and worst-case scenarios for the operation of the business: The minimum budget needed for the business to start operating (or even to operate on its own cash flow) and the maximum budget, while taking into account possible additional expenses. However, this last point is often ignored so as not to scare investors. The popular company Tesla, for example, has not yet had a profitable year. Such an innovative company requires a lot of investment in the creation of batteries, production lines and covering expenses that are difficult to predict when renewable energies are involved. For this reason, the sustainable budget is difficult to estimate and Tesla often needs additional funds, which puts the company at risk. It is hoped that all spending on new technologies will bear fruit and that Tesla will eventually become independent and financially stable. Nevertheless, this example illustrates the need to define the minimum and maximum sustainable budget and to have security funds in place before starting operations.
    
3. Monitor customer payments closely.
   You can be a very good salesperson but if customers are slow to pay, you may find it difficult to move your business forward. Solutions to avoid this include encouraging customers to pay in advance through discount offers or asking them for down payments. You can also send out billing reminders before the due date and apply penalties if delays persist. In the case of Blablacar, the company operates a commission system that invoices immediately when the carpool is booked as a passenger. As a result, payments are thus secure.

 

Cash flow in times of crisis 

The road to entrepreneurship is not an easy one, but financial prudence will help you solve many problems. Good cash management requires effort and rigour, but it is essential for the sustainability of the business, especially when it is impacted by extraordinary and external events such as an economic crisis, a natural disaster or a covid-19 type pandemic. Therefore, it is essential to have sufficient reserves to deal with such unforeseen events and the elements mentioned above need to be examined even more closely than in "normal" times. Attention should be focused on reducing costs, increasing margins and improving working capital requirements with the objective of keeping as much cash available as possible. Anticipating cash flow remains more than ever the watchword. A major crisis is also an opportunity to rethink its business model. Getting through it thanks to good cash management will make you all the stronger and strengthen your position on the market!
 
I-Teng Leung et Daria Nikolaevskaya
Innovation Time Genève

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