One thing that will make or break your startup...
Picture by Maitree Rimthong (Plexels)
“Give me six hours to cut down a tree and I will spend the first four sharpening the axe.” (Abraham Lincoln).
Preparation.
Cash is still king! Following on from the first post analysing the results of a survey by entrepreneurs and the 5 priorities for the top 10% of startups, perhaps unsurprisingly, financial risk is the #2 concern for entrepreneurs.
If this is your first solo effort, managing the pressures on yourself, and the knock-on effect on your family and friends, is vital if you are to be successful. It is a marathon and not a sprint, and if you are not properly prepared to deal with the unique pressures of being the financial backstop for your new business it can have far reaching consequences, and the statistics for being successful are not on your side.
Funding any start-up generally falls on the founder, and often family and friends – and once you’ve opened the tap on personal resources, as with any project, it is extremely difficult to turn it off. This is not just a business, it’s an emotional commitment to creating your dream – your dream for the business, and your dream for fulfilling your personal aspirations - it is your blood, sweat and tears which will make it or break it, but what can you do to reduce the risks?
You can have all the commitment and dedication in the world, but if you neglect the financial management you will most likely fail. If this isn’t your area, find a business partner you trust (and I mean trust with your life, not trust with your sandwich choice!) or an independent accountant who will help you prepare and tell you how it is – financial management is not an area for creativity – conservative approach, cash is king, and cold hard facts are the order of the day!
As we covered previously looking at the importance of preparation (video post), when you’re running your business, you will identify and focus on certain key metrics which provide a good indication as to whether you are going in the right direction. One of the objectives of the business plan is to help you identify your assumptions. Those metrics and assumptions do not necessarily need to be right (although that obviously helps). However, they do need to be clear and measurable so that you can use them as a benchmark once you’ve started. They provide early indicators of both what is working and not working, and the likely impact on your finite resources so you can take action and know how long you have got to see get it right.
This cycle of plan, act, measure, review is vital once you are running your business and will help with your priority setting (covered in more detail in the next Article looking at time management). When you are building your business plan, the cashflow model is at the heart of your financial planning as you look to balance your costs, investment and sales expectations.
The simpler the model the better. Unless your business has large investment capital requirements, you do not need large, complex financial models. The fundamentals of cashflow management are straightforward, and whatever your background spend the time ensuring you have a robust but straight-forward model, that you understand it, and that you use it. You can make few decisions without it, and even if you work with a partner with a financial background, it is vital you have a sound understanding. If you’re not confident, there are excellent short courses on finance for non-financial managers – make the time!
Your cashflow model will help you assess the viability of the business, and develop the key metrics you need to track. In the example below, the business is buying and selling bicycles. The initial investment is £100,000, with capital costs of £30,000 and setup costs of £5,000 in month 1, and fixed costs (administration, staff, marketing, website, IT and other costs) assumed to be flat for the 12 month period. The model is driven from a set of assumptions, including the unit sales price, shipping costs, and the forecast sales volume (from 4 to month 12). In this example, it is assumed all customers pay on order, and suppliers are paid on order for simplicity.
Based on these assumptions, you know your sales price, buy price, sales required, and debtor and creditor payment strategy, all of which can be measured. In addition, based on these assumptions you know your cash breakeven within the month (month 6), and your worst case cash balance (£14,300 month 5). Based on your fixed costs, at this point you will only have one month cash headroom, meaning if you slip your sales by one month, you run out of cash. You have three choices: cut costs, raise more investment, or meet your sales targets...focuses the mind doesn't it!
So to summarise, cash, and specifically cash headroom, is a critical business metric, and provided it is managed correctly it gives you a key indicator on the one issue you MUST get right - avoiding running out of cash! Preparation is key: define your key metrics, consider carefully your appetite for risk, think about your costs, investment options and sales assumptions, and what margin for error you can live with. No two businesses are the same, but if you prepare thoroughly it will stand you in good stead for ensuring you are one of the 10% successful start-ups who survive year 1!
Articles in this series are published on Wednesday each week. The first article, 5 priorities for the top 10% of startups, focused on finding customers. The next article looks at the importance of discipline in the context of effective time management!
Colin Aurelius is an entrepreneur, investor and strategic adviser who has worked with a broad range of start-ups and early stage businesses over a 20 year period. Colin’s experience derives from both successes and failures as an entrepreneur in a broad range of industries including IT, enterprise software, electronics, health and digital media.
Colin works with both established businesses and start-ups in the quest to encourage talented business leaders and entrepreneurs to build profitable businesses which have a positive impact on the world. Colin has worked with Henley Business School on entrepreneurial development programmes, and more recently with the Oxford Said Business School in areas including Fintech, Blockchain and Disruptive Marketing.