Cashflow Q&A: What you need to know and do to help your business

Every startup founder and business owner dreads running out of cash.

It’s always at the back of your mind, yet many people don’t know how to manage cashflow. 

I hear this all the time — even before the coronavirus — so here’s a Q&A covering what you need to know about cashflow and what you can do to stay on top of it. 

What are the benefits of good cashflow management?

Aside from not running out of money, when you’re managing your cashflow well — with a strong forward view — you’ll be in a much better position to achieve your growth plans.

You’ll know what’s coming so you can be confident in seeking funding or taking the leap to expand or diversify, for example. 

Good cashflow management also means that when times are tough, like now for many businesses, you can see how you’re going to get through. 

Why do businesses run out of cash?

Put simply, if you run out of cash, it’s because you’re spending more than you’re earning (for longer than your buffer allows). 

But there is more to it than that. Running out of cash usually happens when you’re not looking at your cashflow closely enough or far enough ahead.

It’s rarely a problem knowing you’re going to run out of money, but it always is if you don’t have enough time to do something about it (and that’s usually at least six months — see below). 

Also, you don’t just run out of cash when things are tough. It can happen when you’re growing fast, too.

I’ve seen businesses get into trouble when they’ve hired quickly and got lots of outstanding invoices, leading to a cash drain that wasn’t anticipated.

How much time do you need to fix a cashflow problem?

Most funding sources — from a bank loan to grants, from the R&D tax incentive to investor funding — take about six months to secure.

So if you know you’re going to be out of cash in six months, there’s no time to wait. You need to be working on your funding options ASAP.

What’s the most common cashflow mistake?

Most founders and business owners will be able to tell you what their cashflow position is right now (roughly).

But many don’t know what their cash position is going to be in six months, or even 12 months.

Part of this is not knowing who owes you what, and how long it’s been outstanding for.

Are there any traps for new players when it comes to cashflow? 

Spending too much, too early, on things that don’t generate sales or keep customers happy.

Here I mean things such as expensive offices or activities that don’t acquire or retain customers.

Another trap is paying people too much, too soon.

I’ve seen people on big corporate wages join startups and continue to be paid the same.

What are the biggest myths about cashflow?

That all you have to do is keep growing and the cash will look after itself.

When things are going well, it’s easy to become a bit complacent and not pay attention to whether you’re truly making enough profit, spending on the right things and collecting the cash.

Is cashflow more important than profit?

No, but it does need its own focus. 

Even if you are making a sustainable profit — at both the product/service level and as a business overall — you can still have a cash problem that can get you into trouble.

This usually happens if your business model involves a delay between raising invoices and receiving payment, which means your working capital (your daily cash needs) are under pressure.

If you don’t understand this and don’t manage your cashflow well, you could end up going broke in what should be a successful business. 

What is a common cashflow crisis for startups?

Startups are often reliant on investor funding, which always (always!) takes longer to secure than expected. Meanwhile, the cash is still bleeding out.

I’ve seen several startups rely on that big investment deal to solve their current cash position, and then be critically exposed when it doesn’t come through.

You can work around this by making sure you don’t put all your eggs in one basket when trying to raise funds, and also by being aware of other funding options, such as the R&D tax incentive and receiving it in advance through R&D financing. 

Software-as-a-Service (SaaS) startups often get into cashflow difficulty when their customer acquisition cost (CAC) takes months to recover via their monthly recurring revenue (MRR). The cost of carrying this can be a real strain when bringing on customers rapidly. 

What is the easiest way to manage cashflow?

Accounting systems can help you with the basics, such as staying on top of your bookkeeping and debtors, and give you a sense of upcoming obligations such as BAS and superannuation. They can also make it pretty easy to compare what you expected to earn and spend (your budget), to what actually happened.

Having said that, many founders and business owners aren’t in the habit of doing this because it is just another thing to find time for. 

Accounting systems can’t give you a forward cashflow forecast, because it involves estimating your future earnings and spend, as well as the timing of loans, BAS payments and more.

This is where a virtual CFO comes in very handy or at the very least, a spreadsheet that you use and check in with each month. 

What do you need to do each week?

There are two main weekly tasks that contribute to good cashflow management.

1. Bookkeeping. Make sure it happens each week so you’re not caught out by unprocessed bills or invoices.
2. Collect the cash. On the same day each week (we like to call it Finance Friday) make sure your customers are billed. In some cases, this might happen monthly, especially if you’re a subscription or membership-based business, and that’s fine. The point is that you need to have a system (and a person) who is responsible for making sure cash is coming in.

What do you need to do each month?

Pre-COVID-19, I’d recommend setting aside time each month to step back and look at how your business went in the last month versus what you expected to happen. This is about looking at:

• How did your sales really go, against what you had thought?
• Are your expenses in line with what you expected?
• How is your debtor collection going?
• Are there upcoming obligations to be aware of (that quarterly BAS/super hit is always a big one)?
• What does your cash look like six months from now? And in 12 months?

Once you get used to doing this, you’ll start to really understand your business’s financial position and feel more confident in decision making.

You’ll also begin asking important questions such as:

• How realistic are my revenue targets?
• What sales and marketing do I need to support them?
• What staffing do I need in place to make the sales and deliver the products/services? 

If you’re an inventory-based business, there are also other considerations, such as how much and how far in advance you need to order replacement inventory, how much you’re carrying at any given time, and whether it will expire in some way.

What about during tough times?

If you’re in the difficult position of just surviving, your attention to cashflow needs to ramp up so you’re monitoring everything listed above weekly and maybe even daily.

It’s a really tough place to be and can, in itself, destroy a business as cashflow management takes all the energy, without leaving any for sales. 

What cashflow help is available?

Aside from JobKeeper (which is not without complications), there are other funding options available if you need a cash boost to your business. They include the usual suspects of bank loans, the R&D tax incentive, investor funding and even equity crowdfunding.

In addition, there are government grants, which can be incredibly time-consuming to apply for but also, for several of our clients, essential this year. 

If you only take one thing away from this article, it should be that if you’re going to run out of cash in six months, now is the time to act. All funding sources take about that long to come through, so there is no time to wait.

Good cashflow management is all about looking ahead and planning. There are some free templates to help you do this, including on our website.

When it comes to cashflow, you can’t afford a wait-and-see approach.