How Startups Can Elongate Their Cash Flow From the Onset
By Space Coast Daily // December 29, 2021
Getting your startup off the ground is an exhilarating experience. Whether your new business is already generating buzz or you’re still in the planning phase, you’re likely working around the clock to keep your new business afloat and moving forward.
While the early months and years in the life of a startup are full of excitement, it’s also a time of high stress and uncertainty. One of the biggest challenges founders face involves managing cash flow, and making sure that you have enough capital to sustain the tough early months.
Begin with a clear starting cash balance and a good sense of your projected expenses in the months to come. You’ll want to get a firm grasp on how long your business will be able to stay afloat under several different scenarios: if your income and expenses remain unchanged, or if either fluctuate.
A common cause of death for startups is lack of funds; to avoid this pitfall, you’ll need to be honest about your starting numbers and keep close track of your spending and income. The farther you can stretch your funds from the beginning, the better. Here are some tips from top industry leaders on how you can elongate your cash flow, and drive your startup forward with confidence.
Try Different Pricing Strategies
“When you’re just starting out you’ll need to think through different pricing strategies. Take time and do a lot of research into your industry to see what your competitors are doing. Competitor based pricing is a common strategy, but depending on your industry, you could benefit from undercutting your competitors and getting your brand out there by offering a more cost-efficient option.
Or on the other hand, your product may capture a luxury niche and benefit from higher pricing. Finding the right strategy will help your business move forward, and keep it from running out of cash. Run through different strategies when you’re starting out, and make sure you understand who your customer is. ” – Stephanie Venn-Watson, CEO of Seraphina Therapeutics
Forecast Different Scenarios
“It’s important to plan for different possible contingencies and come up with a game plan for each one. What would you do if you didn’t take in any revenue for a month? Two months? Determine what you’d be willing to cut and where you could drum up more cash if needed. By forecasting different scenarios and planning for them, you can determine what thresholds your company can withstand and what would force you to go back to the drawing board. You don’t want to be making big decisions on the fly without proper advance planning, so make sure you plan for possible scenarios from the outset.” – Jason Sherman, Founder of TapRm
Work with a Professional
“When you’re just getting started, reach out to a CPA and establish a relationship. They will be an invaluable source of advice, and can give you more information about possible tax credits and grant programs. And as soon as you can manage it, hire an experienced CFO who can oversee spending and handle your accounts. Many founders wait too long to hire a professional money manager or accounting company, and it ends up costing them more in the long run.” – Jeremy Gardner, CEO of MadeMan
Manage Spending Wisely
“Remember that you have to walk before you can run, and make sure you don’t overspend when you’re getting started. It’s good to dream big – every startup should have ambitious goals – but you won’t get there overnight, especially if you blow through your cash too quickly. Be very cautious about committing to long term expenditures or taking on too many employees too soon. One of the most significant factors you have within your control is your spending, so when you’re trying to elongate your initial funding you’ll want to keep a close eye on all money going out.” – Schuyler Hoversten, Co-Founder and President of Swoopt
Automate Processes ASAP
“The sooner you can automate your accounts, the better. When you’re managing your accounts manually you’ll likely waste a lot of time and energy trying to stay on top of various payments and processes. Having to manage accounts manually is inevitable if you’re just getting started, but there are a lot of pitfalls associated with continuing this model for too long. Late fees for missed payments quickly add up, so try to automate things as soon as you can. It will free up your time so that you can focus on other things that will help grow your business.” – Justin Chan, Growth Manager of JuneShine
Cut Nonessential Costs
“When you’re trying to elongate your cash flow you’ll need to check your spending and cut any nonessential costs from the outset. Go over your finances with a fine tooth comb and see what can be cut, even if it’s just temporary. Separate the “nice to haves” from the “need to haves” and go from there. Your top priority is to deliver a high quality product and to keep your customers and your team happy. If your expenditures aren’t aiding those goals, they’re nonessential and are eligible for the chopping block.” – Judy Nural, President and Founder of MicrodermaMitt
“Part of your initial game plan should involve setting financial milestones and forecasting where you’d like your business to be in the months and years ahead. Establish clear parameters for where your business needs to be before you take the next step, like expanding into another market or making a big investment, for example. Track your KPIs closely and make sure they are a foundational part of your forecasting and decision making.” – Kevin Miller, Founder of KevinMiller.com
Plan for a Large Reserve
“It’s tempting, if you hit a windfall early on, to invest in a prime office location or some high-tech upgrades. But the first thing you’ll want to do is set aside a large cash reserve. Having a large reserve on hand will help you weather any unexpected storms ahead; maybe you have to pay upfront for a particular service and you thought you could pay monthly, or supply chain issues derail your shipments and you have to pay extra for key parts. Having a large reserve set aside will give you some peace of mind and it will keep your business afloat when things get rough.” – James Shalhoub, Co-Founder of Finn
“Even if you have the best finance team in the world, make sure you stay involved and know your cash flow details down to the dollar. Having a good sense of your inflow and outflow will help to guide key business decisions. Some leaders prefer to take a more hands-off approach to their finances, but if you’re just starting out and trying to stretch your funds as far as possible, you’ll need to stay on top of those figures. Meet with your finance team often and ask them to loop you in when decisions are being made. You never know when some small detail or figure will spark an idea.” – Jason Wong, CEO of Building Blocks
Don’t Bite Off More Than You Can Chew
“Cash flow management is all about timing. The prospect of a big new client is irresistible for most startups. The mantra of saying yes and figuring out what to do later is revolutionary and inspiring but it can spell serious trouble. Turning down or postponing work may be the wiser options if the costs involved to deliver a project are particularly high. Try offering a discount for postponing or extending the deadline for the order or service. It will give you more time and lessen the burden on cash flow.” – Simon Pop, Head of Brand for InstaSupply
Mind Your Tank
“Once you have a handle on your costs and runway, it’s time to extend the latter by bringing in money. Do you have a basic version of your product ready for limited sale? If your target is enterprise, can you get a pilot client on board? It doesn’t always make sense for startups to go these routes, but it’s important to ask these questions and give their answers a hard look.
There are other ways to bring in money, too, like using your own funds. In the short term, that isn’t ideal, but it can pay dividends down the line. The co-founders of Tableau cobbled together a few thousand dollars of startup capital when bootstrapping the data analytics and software company in 2003. The trio made cuts to their personal spending, hired strategically, and spent efficiently. Tableau received $5 million in Series A funding a year into operation, then claimed $10 million in Series B capital four years later.” – David Ehrenberg, Founder and CEO of Early Growth Financial Services
As they say, cash is king when you’re starting out. Many startups fail due to a lack of cash, so it behooves you to keep a close eye on your expenditures and to make sure you know how to stretch each dollar. Managing your money is as important as obtaining it, so spend wisely when you’re starting out, and you’ll be on track to create a successful and viable business.