Cash is the life blood of every business and once you run out of it, your business will be headed for the rocks. Cash management is critical to every company, but it is especially critical to startups that often have a limited runway to reach their next milestone and start looking for additional funding.
It is surprisingly easy to run out of cash, especially as a startup, and it is usually too late for many founders to realize this, to be able to turn around and do something about it.
Let us look at some early-stage pitfalls which if not carefully considered, could sink your business.
- Not Knowing What Numbers to Look at
As a startup, it is imperative to know what numbers to look at to determine the health of your business. At every point in time, you should have the following numbers in mind:
- Your bank balance.
- The money coming in.
- The money going out.
These are not difficult, and you do not necessarily need a bookkeeper or an accounting system to know them. You can easily extract your bank balance from your bank statement and the money coming in and going out from your daily records. But you will be surprised at how many businesspersons do not look at them.
- Not Knowing Your Burn
This is simply the difference between the money coming in and the money going out. You can calculate this from the numbers above.
Your burn (or Profit) = Money in – Money out
For example,
June 2022
Expenses = 200,000 FCFA
Revenue = 150,000 FCFA
Burn: 200,000 FCFA – 150,000 FCFA = 50,000 FCFA
You could also calculate an average burn, taking into consideration a couple of months. In this case, it is known as the average burn. Here, you will compute the average expenses for, say, three months and the average revenue for the same period of three months and then use the results to determine your burn.
The burn is an important element to help you understand your business’ health.
- Runway (Number of Months)
Your business’ runway is how long (in months) your business has before it runs out of money. It is true that at the early stages of the business, you will be focusing on creating awareness, getting the product to the market, and gaining as many customers as you can. But don’t forget that during this time, you are spending money and you could run out if you don’t keep an eye on it.
Runway = Bank Balance/Average Burn
You take your existing bank balance and divide it by your average burn. This gives you the number of months left before you run out of money.
For example,
June 2022
Bank balance = 250,000 FCFA
Average burn = 25,000 FCFA
Your Runway: 250,000 FCFA / 25,000 FCFA = 10 months
This is easy, but you will be amazed at how many founders do not know these numbers for their company.
The burn might change every time, but this is not a number for you to use to portray a good image of your business. It is a number for you to be really honest and not lie to yourself about your business’ growth and sustainability.
- Growth rate (%)
This looks at the rate at which your revenue is increasing. It is important to determine and understand your business’ growth rate. This will guide you as to which strategy is best to implement at each point.
Growth rate = [Money in (month n) – Money in (month n-1)] / Money in (month n-1)
Where:
n = Current month
n-1 = previous month
For example,
May 2022 (month n-1); Revenue = 200,000 FCFA
June 2022 (month n); Revenue = 250,000 FCFA
Growth rate: (250,000 – 200,000) / 200,000 = 0.25 = 25%
How often should you look at these number? At least every week. And when anyone asks, you should know your numbers.
Now let’s get realistic with a few questions. As a startup founder,
What is your bank balance as at today?
What is your burn?
Do you know your runway? How long until you run out of money?
- Hiring too quickly.
It is usual to do almost everything by yourself when your business is still young and as you start experiencing growth, you think of hiring people to get some of the load off your shoulders while you focus on more strategic areas. This is important, but the timing is also crucial.
Note that hiring people is not just about the salary. To hire someone means your expenses are going to increase. For every person that your hire, you need to provide them with equipment, probably desk space, health insurance, etc., and all these things cost money, on top of their salary.
A good rule of thumb is to consider that an employee will cost about 25% – 50% more than just their salary. Remember that these costs are not one-off, but recurrent every month. So, ensure that the business has enough funds to cater for these costs and other expenses for at least 6 months before you engage more than one staff on payroll.
The Bottom Line
There are countless financial mistakes and ways to sink your startup. One sure way to mitigate them is to seek for professional advice and to try onboard finance experts early on even if engaged on a part-time basis with your company.
