How Cash Flow Determines Startup Success

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Money makes the world go round they say. As CEO of the startup Kite.ly I learned first-hand the significance of cash flow, particularly during the embryonic stage. Cash flow is vital for startups, whether they are VC backed or bootstrapped self-funded ventures. Without exceptional cash flow, the wider vision is impossible to realise. Here is How Cash Flow Determines Startup Success:


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Everybody at a startup has a responsibility to move the needle on revenue, and this must stay core to goals at every stage of growth.

Of course, you don’t want the creative executives and customer support team to focus on cash at all times. That said, founders do well to remind their team of how their roles contribute to the bottom line. This is a positive message, highlighting the impact of innovation and excellence.

If the numbers are good, your startup has the world at its feet. But what impact does poor cash flow and insufficient revenue have on the startup success mission?

Recommended reading: 5 Simple Financial Tips for Startups and First-Time Entrepreneurs

The effects of poor cash flow and revenue

Without enough metres on the runway, startups are at a critical disadvantage. In this section, I will look at the tangible impact of insufficient financials.

Team

Cash flow impacts your ability to pay the team. If there are money issues, morale will nosedive and your best talent will go elsewhere. This hampers culture and damages trust.

Innovation

Creativity and innovation needs space to breathe. Revenue and predictable cash flow provides this capacity. Without this, you will be caught in the relentless churn.

Growth

Without the budget to invest in marketing and advertising, the startup can’t succeed. This is a vicious cycle. On the flip side, it can be an opportunity. If revenue picks up and you get cash flow right, you can feed the marketing machine to scale sustainable growth.

Charges

Constant borrowing will heighten long-term bank charges and interest payments. This is best avoided, for obvious reasons.

Relationships

Late payments to suppliers, partners, and consultants will harm valuable relationships, and damage your network.

Recommended reading: How to Put in Place Financial Management For Your Startup

How to prevent revenue and cash flow issues

Let’s assume that your startup has established product market fit, and has built a solid position in a receptive market. You have a base of loyal customers, and the growth forecasts are good. Everything is in place to scale, but cash flow and revenue could still present an obstacle. How can you minimise this danger, and follow your path to world domination?

1. Regular forecasting

Most importantly, accurate forecasting. Keep tabs on expenditures, and cross-reference with reality on a regular basis. Get financial assistance where needed, and never let the numbers get away from you for a sustained period of time. 

2. Refine your terms

Startups and SMEs must get beyond the fear of strictness on payment terms. Typically, this is most problematic in B2B spheres - where invoices are ignored and payments are delayed. But B2C also has a problem. Shift to advance payment terms if possible, or take on direct debit. There are a number of great fintech products out there to help with this.

3. Streamline payments

The easier it is for your customers to pay, the more likely they are to oblige. As mentioned in the point above, consider smart systems to collect payments online. You can also offer discounts for early payments as an incentive.

4. Prepare for the worst

Get close to your bank, and stay friendly with lenders. If you need to have a tough conversation to keep things ticking over, these relationships will be key to survival.

5. Outsource collection

Specialist firms will enforce your payment terms, so you can focus on the job at hand. Of course, this has associated costs but the benefits often outweigh them.

Summary

From experience, my startup only makes decisions based on data - with a view to every initiative offering return on investment and positive impact on revenue. It’s not only about knowing your product adds value to an audience; it’s about communicating this fast enough to generate revenue when you need it most. No matter how great your value proposition is, without a growth engine to onboard new customers, the business will fall flat when the cash runs out.

Cash flow affects what we can and can’t do. PR, marketing, and events all cost money, but also generate interest and ultimately sales. It is a tricky balancing act, and there is always calculated risk involved. This is especially difficult when payoff might not arrive for weeks or months after the fact. The most important thing is to measure the ROI of everything you do, and double down on the most efficient methods of generating revenue and guaranteeing cash flow.

Over to you now. What's your experience of cash flow for your startup? Tell us your thoughts in the comments below. 

 

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Thursday, 16 August 2018
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