Keep calm and carry cash

Working in a startup company is tough. Founders face many challenges: Creating a brand;  getting customers to believe in their company;  developing cutting edge products;  and persuading customers to buy or use their products and services. The financial operations team, however, is a valuable and often overlooked resilient sales strategy and support system.

Financial leadership holds the keys to the cash flow castle. If you have ever started or worked in a small company, you know that cash is king. Financial operations are the company’s lifeblood when it comes to cash management.  Your finance partner forecasts the cash you are burning, including projecting the runway you have left. They are managing the delicate balance between collections and payables, all while trying to make payroll. This is an immense and stressful responsibility.

I have direct experience managing cash for a few startup companies, so I feel comfortable sharing my experiences. There was a point in time at one company where I didn’t know if we were going to make payroll, each pay period, for nine months.  It’s amazing how creative you get when you are looking at a current cash balance that is less than the next payroll.

Financial leadership figures out a way to make things work when cash flow is tight. This is a significant responsibility and one not to be taken lightly. But understand this very important point: Your financial leadership has your back. And you will take comfort in knowing this when cash gets scarce. Finance knows it, and it’s their job to maintain calm and composure through rough times.

Following are four simple, non-comprehensive suggestions on managing cash:

Don’t wait too long to raise money – Raise capital with cash runway. Some companies raise a ton of up-front cash to avoid near term distractions from raising another round.  Others raise as much or as little to get them through the next value creation milestone so the economics in the next capital raise are more favorable to existing ownership.  Either way, make sure your company isn’t waiting until the last minute to raise capital. The side effect of waiting too long can be disruptive and even fatal to sales, marketing and ongoing operations.

Manage your billings closely – Every dollar counts so get paid on time.  Contact your customer two weeks before your invoice is due to make sure they have the invoice in process for payment.  You can identify issues early that may hold up payment and resolve them in advance.  This will help smooth the process and ensure you are paid on a routine schedule.  Establish strong relationships with your customers.

Be productively paranoid – Set back up plans. A great Plan A has a great Plan B. A pre-established revolving line of credit, revenue based lending, or bridge loans are an option.  These may not be popular options, but are financial tools to extend the cash runway.  Plan for them now hoping you don’t need to execute the backup plan.  If you do, you will be glad you planned for it.  If you are a software or technology company where intellectual property is your key asset, work with a bank that understands your business model and is familiar with your market.   In Colorado, two solid “go to” banks include Silicon Valley Bank or Square 1 Bank. Other traditional banks require the company to pledge physical assets as collateral for loans, which may not exist for software companies who develop and aquire intellectual rather than physical property.

Accept reality – Hope is not a strategy, and failure is not a reasonable option. Accept the fact the company needs to actively manage the cash situation.  If things are going sideways, don’t ignore it because it won’t go away.  Confront it head on with personal courage. It’s amazing how creative you get when you must.

At the end of the day, these are not life-threatening events, but they can be very stressful. Your financial leadership is there for you and your company and must have a seat at the table.  They understand the financial challenges and how to maneuver through key issues. Your finance team is there to help the company succeed. The entrepreneurial spirit isn’t reserved only for founders. There are financial leaders who share the same fear of failure paradox. You want these warriors beside you in battle. 

Categories: Company Perspectives, Finance, Management & Leadership