Managing Your Cash – It’s More Than Just Money in the Bank

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Image by: Tatiana Popova

Do you cringe when you hear the phrase “cash flow statement”?  Probably makes your head spin.  Does the phrase “cash flow statement” evoke images of a stern accountant staring at you through horned rimmed glasses with a look of disdain on his face as he attempts to explain, in nauseating details, how to calculate cash flow from a GAAP perspective?  As a business owner, entrepreneur, or the CEO of an early-stage company, the last thing you want to hear about are adjustments, accounting entries, depreciation, and amortization.  You just want to know how much cash you have, how long it will last, and where all your cash is going.  Knowing your cash burn rate and the length of your cash runway are critical metrics you’ll need in managing and growing your business.  Pair this with a dynamic cash forecasting model and you’ve got a winning formula for success.  Running out of cash may be one of the most prevalent reason startups and small businesses fail.  According to Bill Carmody, an INC.com contributor and Founder/CEO of Trepoint, approximately 96% of businesses fail within the first 10 years as a result of poor cash management practices.  These are pretty grim and sobering statistics.  Here are some tips and tricks that I’ve gathered from my many years working with startups, early-stage, and high-growth companies while helping them manage their finances and cash.

  1. Know your cash burn. Think of your cash burn as the amount of cash coming into your business from sales less the amount of cash you pay out. As a startup or early-stage company you are most likely using far more cash than you are taking in which is why we call it “burn”.  I’d recommend updating this at least monthly, more frequently if your business is moving along at a rapid pace.  Pinpoint precision is not necessary, but capturing the “big ticket” items is (rent, employee salaries & benefits, travel, cushion for the unexpected).  Knowing, being in tune with, and managing your cash burn could save your company.
  1. Keep an eye on your cash runway. Now that you know your cash burn, you can use it to determine your cash runway.  Your cash runway is the amount of time, usually months, that your cash balance will last before you’ll need to get your next round of funding, obtain additional cash from investors, or rely on profits to fund your business.  The formula is simple, but making sure you have the right cash burn number is key.  Let’s assume you’ve just landed $1 million in angel funding, you’ve been in business about a year and are still in the startup stage.  Let’s see how it looks under two different scenarios.

(a) With no revenue or sales yet, your cash in number is $0. You have just hired your first employee, a software developer ($120,000 annual salary and benefits), you recently signed a lease for a small office space ($24,000 annual rent & utilities), you estimate travel costs of $5,000 per month to pitch your product to customers and other office related expenses are $1,000 per month.  Your cash burn is $18,000 per month and your $1 million in angel funding should last about 56 months or 4.5 years.

(b) But, you anticipate growing and hiring additional employees down the road, eventually moving into a larger space and adding advertising and marketing to your budget. Now, your monthly cash burn is up to $50,000 per month which means that your cash runway is down to 20 months, less than two years.  You’d better start your fund raising now!

  1. Have a solid and dynamic cash forecast. Having a solid, dynamic cash forecast will take your cash burn to the next level. Although by no means a crystal ball, your cash forecast, if done right, can provide you with insight into your business and bring structure and discipline to your planning processes.  You can use the cash flow worksheet provided by SCORE as a good starting point.  You may want to map out some historical data first to get an idea of trends in your business and use these trends to project future results.
  1. Control your expenses. This probably seems like a “no brainer”, but it may be hard to resist incurring, what could be, unnecessary expenses once you’ve gotten a windfall of cash from your first round of funding.  It may be tempting to fly first class, eat at the best restaurants, hire high level executives at hefty salaries or spend exorbitant amounts of money on advertising and marketing all in the name of launching or building your business.  Here is where I would advise you to take a step back and ask yourself “what benefit will the business derive from this?”. Close your eyes and remember why you took the path to entrepreneurship and business ownership in the first place; remember your vision.  Treat your business as you would your child or favorite pet.  Feed it with good food, nurture and care for it.  It will grow and you will be one step closer to your dream.

These are four easy steps to help you manage your cash and hopefully provide you with the means to succeed.  Odds are against most small businesses, but that shouldn’t deter you from striking out and following your dreams.  If Oprah Winfrey and Steve Jobs can do it, why not you, why not me?  Have I inspired you to take hold and take control?

Susan Nieland, CPA

CFO Solutions, LLC

 

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