You’ve reviewed your startup’s financial numbers and the reality sets in– you’re running out of cash. What now?
First, know that you’re not alone. Many other founders have been in your shoes and have made it through. Second, while you might be tempted to panic, don’t! There are options for you.
If you play your cards right you have the potential to turn your company around into one that is efficient, profitable, and self-sustaining.
Being at the end of your runway forces you to make tough decisions. But these choices can eliminate non-value-adding expenses and redirect your attention to value-generating ones.
Throughout the article, Zeni’s CFO, Arman Zand, provides personal tips on surviving a short runway, avoiding running out of cash, and coming away from it thriving.
The Reality Of Running Out Of Cash
You’re not the first to run out of cash and you certainly won’t be the last.
One of the biggest reasons startups fail is because they run out of money. Based on an analysis of more than 100 startups, 38% reported running out of money as the primary reason for failing.
There are a few reasons why startups find themselves in this position:
- Difficult to generate revenue: Achieving expected sales isn’t always easy for an early-stage startup.
- High burn rate: Expenditure is typically higher than revenue for startups. This can deplete cash reserves quickly.
- Trouble with funding: External funding is a huge asset for startups. But sometimes securing an additional round of funding can feel near impossible.
- Limited financial visibility: It’s hard to keep track of cash flow when working in ten different finance platforms and using manual processes.
- Market conditions: External factors, like economic downturns play a huge role in generating revenue. A bad market can really impact if a startup sinks or swims.
Low On Cash? Tips Straight From A CFO
Over the years, Arman has worked with startups of all shapes and sizes. He has successfully helped companies navigate periods of low cash, and has a knack for not only helping them survive but come out thriving.
Discover 11 essential tips for when you’re dealing with a short runway:
#1 Honesty is the best policy
This is the time for radical honesty about the current state of your finances and how you got there in the first place.
Review past decisions so you know how to avoid making the same mistakes in the future. Then identify the key areas for improvement that will have the biggest impact moving the needle forward to profitability.
#2 Understand the delta
Know exactly what the gap is between how much you make, how much you have, and how much you absolutely need to spend each month.
Then work with key members of your team to brainstorm and implement ideas for how you’re going to close that gap before you get to the end of your runway.
Review and eliminate non-essential expenses and think of creative ways to generate more income with existing resources.
#3 Check your vendor list
Are you able to reduce seats on Zoom and use Google Meets instead?
Does everyone really need access to SalesForce?
Make sure you’re not paying for vendor subscriptions that you’re not using.
#4 Focus on the products or services that are margin positive
If you have negative margins, it’s time to consider increasing your pricing.
This could result in slowed growth and even some churn, but when you’re running out of cash it might be better to have $100,000 in sales that you’re actually making money on, than $1M in sales when each sale is losing you money.
#5 Consider Revenue Finance
Firms like Stripe, Capchase, and Pipe all provide revenue financing and your company could be eligible.
#6 Look into non-recourse factoring
You should also consider non-recourse factoring if you’re sitting on a large invoice from a credible company. Firms like SVB might be able to help.
#7 Finance existing SaaS Spend
Did you know you can finance existing SaaS spend? Firms like Gynger can help.
#8 Renegotiate your contracts
SaaS firms may be willing to pause or reduce your cost temporarily while you’re getting through the tough times.
#9 Move to reimbursements
Cut all credit cards for T&E and move to employee reimbursements instead. When your team has to provide receipts and get reimbursed, expenses go down.
#10 Be ready to cut headcount
While not ideal, be ready to cut headcount for your best employees that are not generating or supporting revenue. Consider using contractors that invoice you over 45 days.
This isn’t the time to worry about maintaining friendships. Your team will understand if they care about the company.
#11. Consider issuing more equity and asking your team to take a 50% pay cut for a short period of time
While issuing more equity and cutting their pay may not work for everyone, the real believers might take you up on it.
Stay Proactive By Extending Your Runway. Tap Into The Right Tools.
While it may feel hopeless in the moment to extend your startup’s runway, try to stay positive throughout the process. We have seen many successful companies face financial difficulties and come out stronger on the other side.
A recommended way to avoid low cash reserves is to tap into a financial dashboard. Having access to all your finances in one place can help you pinpoint issues early. Likewise, financial experts like Fractional CFOs can help you understand the meaning behind the numbers.
Overall the key is to stay ahead of the curve before things get hairy, and if things do, take the right steps to get out of it.