How Don Wettrick of StartEdUp Teaches Life-Changing Innovation Secrets to High School Students
Did you know up to 82% of startups and small businesses fail because of poor cash flow management? We’re willing to bet you didn’t start a company based on your passion for cash flow; but as a tech startup, cash flow management is crucial to successfully navigating rapid growth and securing venture capital.
As the inevitable happens and business strategies change, delays occur and new opportunities arise, one constant should remain: cash (flow) is king! It is crucial to the success of your company that you understand the ins and outs of managing your cash flow.
#1: Close a big round of funding? Create accountability, asap.
The discipline of cash management is just as important after closing a round of funding as it during the initial phase of the business. It can be easy to lose sign of cash flow when a large round of funding closes and you’re feeling flush with cash. As this point, it is important to create accountability around the financial commitments made to funders and develop smart, strategic spending habits. Creating weekly cash flow reviews, developing a financial projection model and having monthly financial reviews comparing actual performance to the financial forecast will establish controls around tracking cash balances, planned spending and anticipated collections.
#2: Commit to making data driven decisions.
A robust budgeting, forecasting and financial reporting model is critical to strategic planning and should be a key component of cash flow management. The model should include a realistic plan for revenue growth and associated spending, combined with associated balance sheet activity. This data provides monthly projected cash balances and should inform decisions such as acquiring debt, seeking additional funding, and regulating spending.
#3: Don’t fall prey to misleading financial ratios.
Financial ratios are a powerful indicator in cash flow planning. Monitoring trends in the current ratio (one of the key liquidity ratios) will show the pattern of growth or decline in current assets vs. current liabilities. A healthy company traditionally has a current ratio between 1.2 and 2; however, in the early stages of a business, this number can be misleading. Pay more attention to the trends than the actual result to avoid a false sense of security (particularly after a large funding round) which will fund ongoing operations as revenue ramps. Days Sales Outstanding (DSO) reflects the days it takes to collect from a customer. Use this ratio to evaluate current payment terms and project a receivables balance in the financial forecast.
#4: The most tedious, yet critical part of success.
Now that you’ve created accountability, developed a plan for revenue growth and understand financial ratios, you must track your day-to-day cash flow in a cash projection template. This weekly report of cash inflows and outflows gives a tactical view of cash activity, and should relay the following to your team and board members:
The cash projection template is most effective when prepared weekly. An accounting system with an online banking feature makes it easy to quickly reconcile cash activity prior to reporting on cash.
Understanding how to manage your company’s cash flow is crucial to your success. There is no quicker way to lose credibility in the eyes of a potential investor than to hand over messy financials. It is a clear signal that you don’t have control of your business. Before you start your capital raise, invest time in understanding cash flow management and getting your financial house in order.