Welcome to the razor's edge Nolan,
CASH FLOW and Control of CASH Burn Rate, most startups fail because of insufficient cash flow. Your runway needs to be paved with enough cash to make take off.
The free cash flow at the end of the runway needs to be great enough justify the initial investment.
Good luck, Dave
My best advice is to really develop your financial reporting and education for your boss. Producing solid, accurate accrual-based P&Ls and projections are important, but even more important in the start-up stage are accurate cashflow statements and projections. Managing your working capital is your most important job, as it is very possible for you to be healthy and growing on an accrual basis, and still run out of cash! In fact, fast growing, successful young businesses are often low on working capital as they need to plow so much into growth.
Of course, different businesses have different cashflow characteristics. I can't tell from your question what type of business you have, or I could opine more clearly. For example, the fashion clothing business, has terrible cashflow characteristics; long lead order time, big up front costs in manufacturing, inventory and shipping, and customers who are notoriously slow to pay. These businesses need lots of working capital or a great receivables factoring solution. If you are in a subscription-based business, you get paid up front for delivery over an extended period of time, so you tend to be cash-rich.
One final thought...DO NOT assume that your boss actually understands the difference between accrual and cash accounting! Very often, they really can't read financial statements properly, so take responsibility for presenting the facts in a manner he/she will understand. They are often too embarrassed to admit their shortcomings.
Nolan. Having been in your position I agree with David. Keep the company lean and mean. Try to keep everything on a month to month basis, instead of longer term contracts. This gives you the flexability to make cost cuts on the fly. Cash flow is king though.
Dear Nolan - Conserve your cash and plan for the worst. New businesses typically over-estimate revenue, under-estimate expenses, and are too optimistic about the time until the business will break even. Few businesses have failed because they did not spend money fast enough. Good luck to you!
Dave's answer is great. Cash is king! As a small-business owner myself, I can attest to the importance of cash flow. Get paid before you pay whenever possible. Present clear and easy to understand information to your boss and try to understand the question behind his question. Cash flow shortages can kill an otherwise successful business. When you run projections, be sure to add 10-15% to your final expense estimate. There will always be an unexpected expense or missed revenue. Lastly, one thing that has carried over for me from our household budget is to watch recurring expenses. If you have the cash, often times making a larger upfront investment will save you from recurring expenses that can eat away at your margins. Best of luck!
Great question. I assume you have a detailed business plan and execution time table. Since everyone knows that new businesses burn cash, you need to watch it like a hawk! Execute you business plan and maximize your successes and minimize your mistakes that are burning cash with little reward.
It's an exciting time to be starting a new venture, but being the CFO in a start-up makes you reasonable to be very diligent on the use of the funds. Realistic and updated cash flow reports will be the life blood of your success or the root of your future challenges. Good luck.
I have to agree with Dave and the others. Cash flow and burn rate is king - from firsthand knowledge of two experiences back in the dot-com era.
The first was my own company, which I tried to fund from minimal start-up funds and purely through cash flow. But when clients delayed payments or we had a slow month, I didn’t have a critical amount of working capital to pay employees and overhead. I was eventually forced to fold my company due to cash flow crunch.
Then I joined a high flying start-up back that had venture capital lined up at the door with huge checks (at least for a while). Being fresh off my own experience, I counseled my employer, that despite the multimillion dollar checks coming in the door, to be mindful of their spending and to make prudent assumptions about how much and when to count on cash flow from the product and service. Alas, the advice wasn’t heeded and the company ran out of money when the venture capital dried up.
Hope this helps. Good luck!