Speak to anyone I have advised, or sat on the board with and they will all tell you – especially in the early stages – I am a complete pain in the behind when it comes to finances.
In the startup world, 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 part though, it doesn't happen in a matter of days, there is usually a substantial build-up to these cash flow problems.
It seems a lot of startups think that if they run out of cash they can lean on the significant number of funding sources we have in the UK.
To that I say: yes, we are in a time where there is lots of cash available, but that’s not an excuse to stop paying attention to your company’s finances. You need accurate monthly management reports (that are correct) and high quality financial support. In the past, I have asked profitable companies if I could see their latest management reports only to be met with a rabbit in the headlights look.
It's more common than you might think and exists at all levels of business. Also, if you do need cash, those with the money will not only judge you for having run out, but that lack of financial control will work against you 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”, that's when they lose the deal.
Do you want to be profitable or revenue growing?
The first thing you need to decide is which route you are heading for: profitability or revenue growth. You certainly need to know what level of balance you are comfortable with as jumping between both is not a good way to run a ship. Straying from the set plan will affect your cash balance and cause some challenges down the road when it comes to the next funding round.
Missing business targets on a regular basis is usually a byproduct of the founder and board having to focus on raising funds, the business treading water and even having to make cuts. While this goes on, the fundraising wall gets higher and becomes impossible to climb.
Watch that valuation
Honestly, most companies that I have seen grow and survive beyond four years and bring value to shareholders did not try and pump up their valuation. More often than not, an inflated valuation is the same as shooting yourself in the foot.
I have sat in more meetings than I care to remember in which founders, boards and shareholders who, maybe a year before were shouting about how amazing it was to raise at some overcooked valuation, failed to hit on financial plans. Then they realise that cash is getting low and no one wants to speak to them as they overcooked the valuation, leaving them no choice but to opt for the business equivalent of a payday loan.
Please, please, please remember: the level of aim you set now, sets the same aim further on.
Where's your CFO?
I met one company recently with millions of pounds in turnover, who didn’t even have a financial controller, let alone any CFO function. I kid you not.
Then there was another company who was just post revenue and told me that all the cash they had now was for engineering. “We will get a finance function once we complete our Series A,” they told me. That's assuming they ever get a chance to complete a Series A.
I am not saying go and recruit a CFO today, but I will give you this example. I am involved with a company that back at post revenue had a chap as part time CFO.
Over the years that part time CFO got them through some funding rounds, probably kept an eye on cash flow and a whole stack of other things. That same company will now grow and do bigger things, but 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.
Simply put, most founders are dire with cash. Good at spending it, but lacking in the rest. In fact, especially in the tech startup 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 should never find themselves running out of cash. They might get close, show me a company that hasn’t – it definitely fires up a board! However, my advice would be this: ignore advice like the kind I am about to give you.
I think there is a lot of false noise around how long it takes to raise money. Every company is different, for some it takes months, for others only weeks, but I have seen plenty of good companies take years. That being said, if your gut, and the current progress of the business, suggests you are reaching a crucial point on the cash front, then don’t ignore it. Don’t think it will just go away, get moving and rectify it.