• David Murray-Hundley

How and Why Not to Run Out of Cash

  1. How and Why Not to Run Out of CashSpeak to anyone I have advised, or sat on the board with and they will all tell you, especially in those early stages with early revenue, I am a complete pain in the behind when it comes to finances.It’s surprisingly easy to run out of cash. Business fail because they run out of cash. People go bankrupt, because they run out of cash. For the most though, that doesn’t happen in a matter of days, there is usually a substantial build-up to this point.It seems a lot of startups think, “If I run out of cash, we all know that the UK has a lot of sources of funds for me to get hold off”. Yes, we are in a time where there is cash available but this is not an excuse to pay no attention to your company’s finances. You need monthly management reports (that are correct) and actually to get some decent financial support. I have asked profitable (for now) companies if I could see their latest management reports and been met with rabbit in headlamp eyes. It’s more common than you might think at all levels. Also if you do need cash, those with cash will not only judge you for having run out, but that lack of control will not work in your favour when it comes to sealing the deal.You know the bit on Dragons Den, when they ask a founder their numbers for the current and previous year, and the answer is “I don’t know” or “roughly it was this’ ‘ yep, that’s when they just lost part of their deal.So do you want to be profitable or revenue growing?Firstly you need to decide which route you are heading for. You certainly need to know your balance of when you are doing one or the other. Jumping between both, month to month and similar, is not a good way to run a ship.Varying away from the set plan was, whether that be by change to revenue or costs, will by default have effects on your cash balance and cause some challenges of the next funding plans and company strategy.Missed business plans on a regular basis are usually byproduct of the founder and board having to focus on raising funds, the business treading water and even having to make cuts. And while this goes on, the fundraising wall gets higher and higher, or impossible, to climb.Some milestones to get to that next point!Valuation:Honestly, most companies that I have seen grow, survive beyond 4 years and bring value to shareholders, did not try and pump up their valuation so high that they ended up shooting themselves in the foot.I have sat in more meetings than I care to remember now, in which founders, boards and shareholders who, maybe a year before were shouting how amazing it was to raise at some overcooked valuation, failed to hit financial plans. They then realise that cash is getting low and they urgently need cash but no one wants to speak to them as they overcooked the valuation and the only option is the equivalent of a payday loan company.Please, please, please remember, that the level of aim you set now, sets the same aim further on.Where’s your CFO?I met one company recently, with a few million turnover, who didn’t even have a financial controller, let alone any CFO function. I kid you not and they had some service that you would use for maybe a few transactions a month, carrying out some process and producing what were pretty inaccurate monthly management reports.Then there was another company, only last week, just post revenue, who told me clearly that, all the cash they had now was for engineering, we will get a finance function once we complete our Series A. “Once we complete”. That’s assuming they ever get a chance to complete a Series A.I am not saying go and recruit one today but I will give you this example. I am involved in a company that back at post revenue, we had a chap called James as our part time CFO. Over the years that part time CFO, has got us through more seed rounds, series A, probably kept an eye on us running out of money and a whole stack of other things that I know he has done. That same company will now grow and do bigger things, way after James moves on to do other great things for companies. I am not sure we would have got through some of the challenges we did had it not been for this individual. The same can be said of many other great CFOs I have met and worked with.Most founders are dire with cash. Bloody good at spending it, but lacking in the rest. In fact, especially in the tech start up space, money management for a company is the last thing they should be doing and asking for them to explain a balance sheet will not be top of their list of priorities.Finally, good companies really should not ever find themselves running out of cash. They might get close, show me a company that hasn’t (it definitely fires up a board) but for me, my advice would be this: Ignore advice like I am about to give you. Its timing. I think the media, the general noise out of the startup space creates false noise around how long it takes to raise money. Every company is different, some it takes months, maybe even weeks but I have seen good companies it takes almost a year or more. 6months feels a long way of sometimes, but if your gut, current progress of the business suggests thats a crucial point on the cash front, then don’t ignore, don’t think it will go away, get moving on rectifying as that 6months will fly by.David Murray-Hundley “The Grumpy Entrepreneur”#startup #cashflow #entrepreneur #advice #dragonsden #revenue #cfo #valuation

  2. Originally published at https://www.techworld.com/startups/grumpy-entrepreneur-how-why-not-run-out-of-cash-3782726/

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