Nothing kills a start-up more quickly than inefficient cash flow management. With 90% of start-ups failing, cash flow management will be key to separating the winners from the losers.听 As a start-up your number one mandate is to protect the capital you鈥檝e raised.听
The longer you have money in the bank, the higher your probability of not only finding product-market fit (42% fail due to the wrong product) but also the correct channels to scale growth.听
Here we will discuss the top tips for managing your cash flow as a start-up. Avoiding the most common pitfalls of cash flow management may well be the difference between failure and success.听 Read on and give yourself the best chance of being in the coveted 10% who succeed.
1. Know your monthly burn rate and runway
What gets measured gets managed. Step one of cash flow management is knowing where you stand. There are two metrics that are fundamental here; monthly burn rate and runway.
Your monthly burn rate is the total outgoings of your business each month. A lower monthly burn rate, will allow your start-up to operate for longer on your existing funding. Bear in mind your monthly burn rate may not necessarily be fixed. It can often increase over time as costs increase. A new hire for example could markedly change the monthly burn rate.
Your runway is how long the start-up can operate for, taking into account your monthly burn rate. For example if your monthly burn rate is expected to stay fixed at 拢25k per month and you have 拢500k in funding, your runway is 20 months. It鈥檚 wise in the beginning to keep the monthly burn as low as possible. Keeping it lean early on is key. Look to test the market with the lowest cost iteration of your product that allows you to get market feedback.
2. Apply a margin of safety
Start-ups nearly always underestimate their costs and how much cash they require to continue operating. To avoid this pitfall, it鈥檚 wise to apply a margin of safety to your calculations. So how do we apply this principle?
Decide your margin of safety percentage and . 20-30% would be astute. If you feel your monthly cash burn will be 拢10k per month, apply the 20-30% buffer. If we use 20%, consider your monthly cash burn to be 拢12k instead of 拢10k.
It鈥檚 also wise to do this with initial fundraising efforts. If you feel you need 拢500k to operate for a year, apply the margin of safety and task yourself with raising 20-30% more. It鈥檚 a principle Warren Buffet鈥檚 lives by. If it鈥檚 good enough for the billionaire Oracle of Omaha, it鈥檚 good enough for your start-up.
3. Avoid overspending
鈥淥ne of the biggest start-ups mistakes is unnecessary expenditures,鈥� explains Richard Allan of .
鈥淎s a start-up you do not have the same luxuries of larger corporations,鈥� he continues.听 鈥淢imicking more established businesses鈥� spending practices will see you burning through precious funds far too quickly.鈥�
Too often start-up executives are paying themselves 拢100,000 + salaries. If you have raised 拢500k and 3 executives are on 拢100k per year, that鈥檚 60% of your entire funding gone. I鈥檝e seen some start-ups who are due to run out of cash in 4 week paying their entire executive team 拢150k each. Simply reducing this threefold could have seen the team operate for twice as long.
Hiring too many staff too quickly is another common mistake. Founders often hire based on hyper unrealistic sales growth. More often than not projections don鈥檛 meet reality. Hire when you need to not based on fantasy projections.
Shelling out on unnecessarily expensive product builds is another common error. Building an expensive piece of software, using ex Google engineers at a total cost of 拢150k is risky in the early stages of your business.听
Instead build a no thrills bare bones version of your product and get customer feedback. Only when you really know what the customer values should you start building the more expensive, high quality version of your product.
Other overspending examples include;
– 听 Getting an expensive office vs remote work or hotdesk
– 听 Spending through the roof on merchandise way too early
– 听 Hiring in house legal and accounting teams听
4. Scale through low cost high quality talent + tech
Rather than hiring inefficient, expensive talent you can use freelancing websites such as Fiver. You can hire a designer to make a high quality pitch deck for 拢25 vs paying 拢8k to a professional services firm. Similarly, you can hire engineers from Eastern Europe or India to save cost whilst building the first iterations of your product.
鈥淟everaging efficient tech will save your company tens of thousands of dollars,鈥� explains Justine Gray of finance startup, .
鈥淟egal and accounting expenses can be a real drain on cash flow. Instead of hiring a lawyer who charges 拢500/hour you can leverage plug and play online solutions. Most of your early start-up needs such as employment contracts, share agreement etc. can be accessed cheaply through companies such as Seedlegals. For accounting apply the same principle, use tools like Quickbooks to easily process your own accounts.听听
For sales outreach you can use software. Email automation tools such as Drip or CRM tools like Hubspot can handle your entire outreach campaign end to end and these tools only cost a few pounds per month!