Tips to manage startup cashflow challenges: yesterday, today & probably tomorrow

Whilst founders like to focus on innovation, it’s essential they recognise cash is their lifeblood in the early days. I’ve seen many startups managing cash flow by the seat of their pants. The result can be chaotic, running dangerously low on cash, forcing founders to defer wages, dipping into their savings, or drawing on personal credit cards.

Keep an eye on your cash. Even if you have a great product, growing revenue, and a high-performance team, if you run out of cash, it’s game over. Make proactive cash management a critical component of your growth plan, to ensure you’re building sustainability by focusing on cash liquidity.

Cash flows in and out of your business every day. Handling these flows, along with your cash balance at any point in time, is called cash management. To do it well goes beyond a daily, weekly, monthly routine, effective cash management requires a crafted financial strategy that enables scaling of your venture, and strikes a deliberate balance between earning, spending, and investing for growth.

I’d advocate a startup founder should always have a handle on the cash tiller, managing near term cashflow whilst understanding the patterns and timings in their runway, and a forward view on the timing of raising future capital. It’s not something to be handed off, cash allocation decisions, in terms of quantum and timing,  fall under the founder’s remit and line of sight.

For founders without a background in finance, here’s a ten-step framework to help guide your planning and actioning of cash management in your startup.

1. Timing The fundamental tenet of managing cash liquidity (availability) is understanding the timing and uncertainty of when you need what amount of cash – when is cash coming in, when does it need to be paid out?

Also, when must it be preserved in the short (three months), medium (six months) and long term (twelve months) for future investment on planned development, such as marketing plans and hiring? It’s only after you have a view on your business’s cash needs, that you can plan.

In this context, think about ‘dead time’ for example, when hiring employees. Don’t hire a front-end engineer three months before you’re ready to build the front-end. Time your hires so that you can maximize the value that each person brings to the business.

2. What cash do you have? The amount of cash you have may seem obvious, but it isn’t just the funds in the bank. You’ll have bills to pay, outstanding customer invoices, and earned revenue that hasn’t yet been invoiced. As a founder, you need a view on ‘free cash’ –  cash in the bank, but also what future ins and outs are anticipated.

Cash that you have not received is not cash. Some customers are going to pay you late, and some do not pay you at all. You need to account for this when you plan. Until you receive the cash, it is not cash. Some cash is also tied up and not ‘free’ and you shouldn’t ignore this. Examples of this are VAT and PAYE which you’ll collect from customers and payroll, which is due to HMRC quarterly and monthly. On the other hand, take advantage of HMRCs innovation tax credit schemes.

3. Building a cash budget Now that you know how to calculate your cash position, develop a plan to manage your runway. For a startup this is about understanding how many months your cash will keep you afloat.

Everything you need to run as ‘business-as-usual’ for the next 12 months is your operating cash, this includes salaries, rent, and marketing. Identify strategic cash – funding ear marked for future growth. You need to build flexibility into your projections and consider sensitivities – ‘What if?’ scenarios.

You need to have a clear sense of what milestones you need to hit to keep cash positive. As you get into your stride, your costs become more repeatable and easier to predict, making forecasting simpler. Also be mindful that some cash payments can be annual or quarterly.

The key to cash budgeting is having a sense of your spending profile and cash burn, and then revisiting these estimates monthly at the least, as your position changes. Build monthly and quarterly based milestones, and your forecast will give you a sense of shorthand for cash generation and consumption. Also don’t be black and white, leave yourself a buffer in timing and availability.

4. Discipline Having a strong budgeting and spend control process can help you catch things before you veer off course. The goal of runway forecasting and burn rate projections is to inform cash management decisions. It pays to be realistic as opposed to aspirational. This helps ensure that you don’t find yourself in a tight position if things don’t go according to plan.

Frugality never goes amiss, so keep a cash buffer. As for how many months of operating expenses to keep in hand, the answer really depends on your business model and your attitude to risk. If your company is becoming stable, and you can rely on the accuracy of your financial forecasts for the next few months, then three months of operating expenses may be the magic number. This should leave you comfortable to cover expected monthly expenses with a buffer for any additional one-off costs or shortfalls in revenue.

Most startups need more margin for error in case something unexpected arises, so if you can, gradually build up a cash reserve of six months of burn as a strategy. In a nutshell, spending smarter is all about focus, discipline, as well as selecting carefully where you allocate your scarce resources.

5. Revenue, revenue, revenue. Many startups seek to entice new customers with free trials. That won’t put cash in the bank. Getting customers to pay is the best way to keep the cash moving, and since anyone may try something that’s free, it won’t give you an indication as to whether your product will sell.

A better approach is to charge customers a small fee to take part in a pilot and offer an incentive to purchase at the end of a trial period. If they’re willing to pay, it’s a sign that you have a good product. It’s also likely to be an important validation point for prospective investors.

There are other strategies to consider: ask for a 20% deposit, offer a 5% discount for full payment upfront, or operate a subscription model. Prioritise customers that will pay you more. Revenue is the opposite of costs in terms of timing.

Also keep experimenting with pricing, keep pushing your prices up every few sales until the majority of prospects push back. A startup can 2x or 5x its revenue in a short period of time just by being smarter about its pricing. Many set a price and then are stuck with it.

6. Don’t go on a spending spree post raise Many founders increase burn quickly after raising a round. One joke in the investor community is that no matter how much a startup raises, the money somehow always lasts 18-24 months. Stay lean before you have product-market fit and resist the temptation to spend quickly.

A common mistake is founders, flush with cash, ramp spending too quickly after a fund raise. It’s like being a lottery winner; you’ve been scrapping away, seeing the runway decline, and now you have a pile in the bank! Ramp spending gradually, adjust to a new burn rate and hold the disciplines which got you here.

A good rule of thumb is to set a cap on net burn and bake this into your growth plan as part of the raise, like £100k/month. If you want to spend more than £100k, you’ll have to make up the difference with revenue. One outcome of this approach is that runway calculations become easy: if you raised £1.5m and you are capping net burn at £100k, then you have 15 months of runway.

6. Focus on cash breakeven Aligned to the above cash burn constraints, be clear about what and when breakeven looks like. Many startups fail to hit revenue targets and then slash costs to keep within monthly loss and cash burn parameters. That’s not a growth strategy, it’s a survival plan.

As you expand, your cash management strategy needs to keep a clear line of sight on cash breakeven. Whether it’s adapting to shifts in your business cycle or changes to your business model, it’s important to regularly assess and evolve your cash management approach to make sure the route to breakeven is clear.

7. Optimise operations Don’t ignore day-to-day efficiencies in your operating model to ease cash burn and optimise your growth. For example, spending £25k on an AdWords campaign probably performs worse than spending £5k to try five campaigns and then spending an additional £20k on the best one.

Use funnel optimization tools to improve your sales and marketing conversions by helping identify issues in your go-to-market thinking. Similarly, optimise your targeting. Let’s say your customer attraction becomes 1% better every time you publish a newsletter: with a monthly newsletter, your targeting will improve 12% over a year. The more launch → feedback → iterate loops you execute, the more progress you’ll make, and cash inflows improve.

8. Managing cash between funding rounds There can be significant pressure to spend fast, allocate resources and deliver growth. it’s a tricky dance, and expectations change fast.

Having raised against a growth plan, send regular investor updates. Investor updates are basically a customer success tool. If you send updates, then there’s a likelihood that existing investors will invest in your next round. 

Also consider non-dilutive revenue-based financing, now available to SaaS businesses at around £50k+ MRR, and you can typically borrow 4-8 months of MRR at a 10%-20%. That’s not cheap, but it’s an option if you’re growing rapidly.

9. Raise the right amount Fundraising is a real challenge but be bold and add six months of cushion to your minimum fundraising target. You won’t hit all your target milestones the day you run out of money because, well, you’ll be out of money. Raise the right amount. If you need £2m to execute on your plan, don’t raise £1.5m and revise the plan – that’s a lot of dilution to take and won’t be enough to hit your objectives. Concerns about dilution should be inversely proportional to your likelihood of running out of money.

10. Managing a cash liquidity crisis If you end up in a crisis situation with insufficient cash, don’t panic, but it’s down to your cash management discipline. If you know you’re going to run out of cash to run the business months in advance, you can raise more equity, scale back to cut your cash burn and extend the runway in a considered way. Your options are more limited if you have a sudden, short-term issue, which is where founders often find themselves unequipped, because they’ve not had cash close enough on their management radar.

You can look to your existing shareholders for support via convertible loan notes to bridge the gap for a few months until you are able to secure additional financing – but simply highlights that good financial hygiene and spending habits will strengthen your odds of success.

Take responsibility for the nitty-gritty details of how cash flows in and out of your venture. Know where your cash sits at least every week, have a sense of whether your startup is hitting its financial plan. Flexible forecasting is what it takes to grow fast, and it goes back to how you choose to allocate the scarce resources and funds for competing uses using the tips and strategies above.

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