“Cash is king” is one of the oldest teachings of business, and while keeping an eye on cash collections probably isn’t what drives a person to entrepreneurship, it’s definitely the most crucial part of running any business. The sad truth is that, cash flow surprises lead to the death of many start-ups, amounting to almost 90% of the total failures, according to a survey. No business can sustain at the end of the day without managing cash flow, period.
Bijon Islam, the CEO of LightCastle Partners, provides a rather unique insight on maintaining cash flow to secure a start-up’s growth.
Importance of cash flow at the growth stage
For many businesses, especially for start-ups, growth is one of the key indicators of success. Growth in itself is a big enough problem to crack, particularly cash flow management during the growth stage. In order to grow successfully, the business needs to be prepared to manage all funds effectively. Here’s why cash should be the primary concern.
Scaling the business
Unlike other businesses, start-ups are able to scale at an extremely rapid pace. Initially, they start slow when selling a product for the first time, but just when it gains some traction and becomes popular, scaling becomes a necessity. For that to happen, the business needs a positive flow of cash into the businesses. Meaning, the start-up should be earning more than they are spending just to have some surplus capital they can invest in the expansion process.
The unavailability of cash during the growth stage greatly hinders the business, and it usually falls behind competitors smart enough to maintain their cash flow. Simply put, there’s no way a start-up can even hope to grow without some liquid assets to invest if necessary.
Flexibility
Cash flow, at least a positive cash flow, gives your start-up the added flexibility in making critical decisions or responding to impending problems. Free cash in hand will always be your saviour from a tight spot; cash is king after all.
A properly planned cash flow management system will boost confidence, confidence that enables the founders and co-founders to make a critical or risky purchase in the short term, rather than waiting for it in the long run. Unavailability of cash in such situations would increase costs, opportunity costs to be more specific, resulting in inefficiency in the long run. A positive cash flow portrays positive sentiments to any investors or lenders, making your business more appealing and desirable for incubation.
Maintaining a consistent flow of cash
As a start-up business founder, one of the biggest and most common mistakes you can make is to place secondary goals ahead of the cash flow necessities. The business must have a steady inflow of cash, at least to ensure the operational expenses. Let’s look at the most efficient ways of maintaining a consistent flow of cash.
Clients
This is where the owners, founders, and co-founders need to get their hands dirty. Let’s be honest, not all clients are paying clients, nor do they pay on time. Predicting and maintaining cash flow becomes a gigantic headache when payments are not administered on time. Bijon Islam says “A client is not a client until he pays you. Don’t even record him as your client in your books until and unless he clears his dues.”
Racking their brains, the founders will undoubtedly come with a strategic plan to pursue the right clients. Pursue the clients who you can trust, the clients who are well reputed in the market for paying on time. Build a database of said clients, and the cash will come gushing in.
There’s no need to waste time on a risky client, prone to late payments, just because paying jobs are at a minimum. “Even if there is a scarcity of paying clients, don’t take on a flaky client just to add revenue. Chances are, you’ll spend some money on your end to deliver the end product or the service, but the client will take weeks, months even, to clear the payment. Definitely not worth the trouble,”adds Bijon Islam.
Planning the burn
Any start-up should know what its expenses are, how much cash it will burn for the next month or for the next six months. Financial management of the company will reign supreme in this case, if it is fully functional that is. Efficient financial management will be able to tie the cash burn with the cash inflow, limiting the requirement for external sources of funds as a result. A very effective method that Bijon Islam follows is sales commission. When the inflow is high, the sales team is rewarded with handsome commissions, and when sales are low, they end up with their basic pay only.
If, for any unforeseen circumstances, the cash burn rate is very high compared to the cash inflow, the business might decide to downsize its workforce. Downsizing shouldn’t even be an option unless absolutely necessary, as it creates a negative sentiment in the market.Cash flow challenges for different industries
While most industries do face varying aspects of cash flow problems, it is not always the same for all of them; challenges usually differ from industry to industry. Each industry is uniquely equipped with their own arsenal, effectively solving cash flow challenges as they see fit.
Prepaid Model
Prepaying for goods and services provided is considered to be the most effective model as a whole. Telecommunication industries are a prime example, as most, if not all, take full advantage of said model. As such, their cash inflow is usually higher and quicker than most industries. It’s safe to bet that most companies in the telecom sector find it easier to maintain a positive cash flow than most of the other industries.
Complexities of large bureaucracies
Even if they are in the same industry, two companies may not face the same cash flow challenges. Big bureaucracies usually have a better cash flow management system compared to most small companies owning to the highly efficient financial management teams at their disposal. Lastly, large firms are usually centralised, therefore cutting down costs by reaping the benefits of economies of scale and economies of scope.
Article was reprinted under special arrangement with www.start-up-bd.com |