You’ve probably heard it before: cash is the lifeblood of a business. You need it running through your company’s veins to keep things functioning. Without it, you’ll struggle to do core things like pay employees and maintain your office space, let alone market your business or invest in R&D.
And we see it happen all the time. Founders are so focused on creating an excellent product or service that they let their day-to-day finances fall by the wayside. It’s not uncommon for those same founders to end up having to fundraise earlier than expected or find a way to drastically cut expenses, including their own salaries.
Even if your financial forecasts look extremely promising, you still need liquid capital to make your business run. So let’s talk about cash management.
Keeping a finger on the pulse
It’s critical that you or someone you trust has a close eye on the money coming into your business and the money leaving it. We’re not talking about a high-level view, either. Someone needs to be in the nitty-gritty. Ideally, you’d reconcile your books on a daily basis.
That’s not necessarily realistic for all startups, but try to get your books reconciled as often as possible. If you need to hire bookkeeping services, do it. The majority of founders that we see wind up in cash flow trouble had no idea how bad the liquidity situation was until it was almost too late. Startups that reach a point where they have less than six months of runway left will find it extremely difficult to raise capital on favorable terms. This will dilute the founders and existing shareholders and often leads to a downround — where a company raises capital at a lower valuation than in its previous funding round.
Remember that cash management extends beyond just checking how much money is in your bank account. That number isn’t necessarily a reflection of your working capital. Some of it might be earmarked for bills you need to pay, some should be set aside for payroll, and some go toward any debt you have. Strong cash accounting gives you an idea of what money you can actually use.
The perks extend past cash management, too. Staying on top of your cash flow and keeping your books current means you have a full grasp of your runway. Beyond that, it helps you be in a good position for any investor reviews that come up — and future fundraising efforts.
Developing cash management rules
When your team is small and agile, it’s tempting to let people be an island unto themselves. Even if you trust your team deeply, though, remember that you’ll (ideally) grow. You’re going to need to establish cash management rules at some point, and it’s easier to set those up now than later.
So, think through your company’s ideal expense policy. This can be a daunting undertaking, but we have a guide to walk you through it.
You should also establish rules for:
- Receipts from vendors
- How company credit cards get used
- Credit card reward usage
Beyond just setting up the rules here, you also need to establish the consequences if they’re not followed. You can’t be afraid to take an employee’s credit card away if they can’t adhere to your requirements. These rules and policies can often be set up in a Notion, team wiki area, or part of the employee handbook so the process is transparent and clear to all team members.
Bill as early as possible, pay as late as possible
To keep cash flow up, bill early and pay late (not past the due date, though).
The longer you can go before you need to pay a bill or vendor invoice, the more liquid capital you can keep in your business. So explore payment terms with all of your vendors. And if you like a vendor, work to build a relationship with them. As you do, they’re more likely to extend you favorable terms. Net-30 or even net-60 terms with key vendors can go a long way toward preventing a liquidity crisis. Check with your vendors if there is a benefit to paying early, as well. Some vendors will provide up to a 2% discount on your gross bill simply by paying early. Take advantage of these discounts as they will add critical funds to extend your runway.
Credit cards can also be somewhat helpful, but be mindful. Pay your balance in full before interest starts accruing or you’re literally throwing money away on high interest rates.
If you’re going to use credit cards to help your cash flow, get a finance expert involved to lay out best practices. Credit cards can feel like an easy, quick fix for cash flow problems, but they can land you in hot water fast if you rack up a sizable balance. We have a guide on Brex and Ramp two credit cards commonly used by startups that you can review here.
On the flip side, try to get money into your business as quickly as possible. Make sure invoices go out promptly (same or next day) and have a clear process for collecting outstanding ones.
If your startup offers subscriptions, you might consider offering deals that reward upfront payment. Say a subscription costs $125 a month. You could offer a year for $1,250 if they pay for the year’s subscription in full.
Bill early should also apply to any trials your company extends. If you do a free trial, make sure it’s short. And be careful about how that trial gets used. Could someone keep making new email addresses to continually re-up their trial? Don’t let your company get taken for a ride.
Protecting your cash
After the Silicon Valley Bank (SVB) collapse, a lot of startup founders started thinking more carefully about not just keeping sufficient cash on hand, but also where they keep it.
While the FDIC ultimately did step in to cover deposits in full, without that break from protocol, founders banking solely with SVB could have found that anything over $250,000 in the bank evaporated.
Don’t let yourself end up in that situation. We have a guide on protecting your funding. The key takeaways are:
- Explore opening different types of accounts and accounts at different institutions, either on your own or through a cash sweep
- Look into using a bank network
- Consider a bond ladder or a brokerage account
Ultimately, you want to have your money somewhere it can see some sort of yield while minimizing its risk. Your main objective is preserving that capital so your business can use it when it needs it.
And, of course, we can help. As accountants who work exclusively with tech startups, we’re always thinking about ways to finesse cash management and protect cash reserves. To get help with your company’s cash management — both in terms of actually tracking it and developing a cash flow strategy — contact us.