Posted by & filed under Entrepreneurship, Funding, Startups.

It’s the beginning of a new year, and time to start working on those new year’s resolutions (if you stumbled upon this post later in the year, even more reasons to get to work NOW! :)). This post won’t help you lose weight but take care one other important resolution: having your precious startup finances in check. Here I will give you 7 tips on how to master one building blocks of startup finances: cash flow management.

In my previous post, I talked about the reasons 4 out of 10 startups fail (spoiler: it’s also related to cash-flow management). In this post, I will give 7 tips to master your cash flow and NOT be one of the 4. Some of the tips sound very simple & obvious, which they are, but they are still forgotten way too often. 

  1. Make it a habit to stop for a couple of minutes once every two weeks, and check the money coming in and going out – cash flow. Preferably do it with an outsider to get an unbiased view. And remember to do it properly! You don’t want to go bankrupt because of a silly calculation error. Tweet about it!
  2. Understand when the incoming money will really be in your account. If you sign a deal today, it doesn’t mean the money will be in your account tomorrow. It could come next month, next year or even later if that is what you agreed! So, understand when you will get the money, and make sure you won’t be out of cash before that. Tweet about it!
  3. Remember that not everyone pays their bills in time. There also might be other problems delaying the payment like dealing with reclamations. So, don’t count on that one payment too much! Tweet about it!
  4. It usually takes 2-3 years before your company is cash-flow positive. Most first-time entrepreneurs believe they can do it less than 6 months. And that obviously means trouble. So, a bit of pessimism will be a good aid in your journey. It is better to be pleasantly surprised than the opposite, especially if it means you will be out of money and business. Tweet about it!
  5. Pivot fast. Startups usually pivot, i.e. change from plan A to plan B or even D 3-5 times at the beginning. And every time you pivot, your revenues will be further and further in the future. So, the faster you pivot the faster you will get money coming in. Tweet about it!
  6. Multiply your estimated need for funding & time frames by 3 (or π/pi if you want to get precise), and you will get much closer to reality. Why three? You just read the reason for it: pivoting. That makes even the best estimates unrealistic. Based on our experience, multiplying the estimates by three gets startups closest to the reality more often than not. So, if you estimate that your product will be ready in 3 months, it usually takes 9 months in reality and so on. Tweet about it!
  7. Understand what you are selling, to whom and for what price. Before you yourself understand what you are doing, it will be hard to convince others to buy. It doesn’t mean your product/business has to be perfect, but no one is going to buy it if it is only almost ready. Tweet about it!

And that’s it! All in all, it usually takes longer and costs more to get your startups going than you’d think. It all might sound pessimistic, but think of it this way: the better you are prepared, the more likely you are going to be one of the success stories!

 

Related post: Why 4/10 startups fail: the realities of cash-flow management

 

Posted by & filed under Customers, Funding, Product development, Startups.

4 out of 10 first-time entrepreneurs fail because they forget one of the basics: following their revenues and expenditure – cash flow. In established companies balance sheets and income statements are king, but for startups, it is all about following the numbers in their account: money coming in and out. It sounds very simple (and it is!), but still, I have seen way too many startups to fail because of it.

Here are the 3 common reasons this happens:

 

  1. Not checking your revenues & expenditure often enough

Looking at your finances is a tedious task. It’s quite boring, and you already have so many other important things to do. And let’s be honest: only a few of us are excited to look at the row of minus’, which is usually the case at the beginning of the startup journey. Thus we often decide to do it “tomorrow”. And more often than not, the startups notice the warning sign too late.

  1. Being too optimistic

You need to have a bit of crazy optimism when you are an entrepreneur, but not when you are estimating things like your expenses, funding needs and time x, y and z will take. Startups tend to make their estimates only a small portion of what they really are, which makes them very ill-prepared.

But why that happens? It is partly being overly optimistic & part not understanding how startups work. Things rarely work out how and when you want them to, and there are many variables you just can’t predict. The market, competition, and even the customers’ needs will change. As time goes by, you will also start to understand your customers better. All this means you will have to make adjustments to achieve better product-market fit. Startups usually pivot, i.e. change from plan A to plan B (or even to plan Z!) 3-5 times at the beginning. All this take time and money and push the time of your first sale forward. But expenses still start from day one.

That is why it is important to constantly check your cash flow and be realistic about the ‘whens’ and ‘how muchs’. When you do that, you know when you are going to be out of money and still have time to do something about it. It takes 3-6 months to get funding, investments, etc. so I can’t stress enough how important it is to knowing when you are out of money early enough. Too many startups come up to me less than a week before they were out of money and still believed they would magically make it. You can guess what really happened.

  1. Not understanding when the money is actually coming to your account

For some reason, many startups believe that when they sign a deal, their money-related problems will fly out of the window. But that is not how it works. It might take weeks, months if not even years before the money is actually in your account! It all depends on what you agreed. Also, not everyone pays their bills in time. Trust me, it happens more often that you’d think. There also might be other problems delaying payments like dealing with reclamations. But again: your expenses won’t wait. So remember: even though money is coming in, sooner or later, you might be out of money and bankrupt well before that! Ask yourself: when exactly we will get the money, and will we survive till then.

In my next post, I will give you more concrete tips on how to get your time frames and expense estimates close to reality.

 

Related post: 7 tips on how to ace your startup finances – cash-flow management