Why Cash Is King For Startups: Protecting Your Cash Reserves
Profitability isn’t a startup’s life raft when the market dips — cash is. In the kingdom of startups, cash is king for a good reason. Startups can’t function without cash, nor can they continue forward with expansion or production even in a flourishing economy.
Inflation hit 8.6% this May, a record high since 1981 in the United States. The war on Ukraine has heavily impacted the world’s food distribution and farming abilities, and a new recession is approaching. What does this mean for startups? Is funding still an option?
Venture capitalists aren’t halting investment funds, but they’re not offering anywhere near the usual amount. Startups must carefully watch their cash flow, burn rate, and runway. Last quarter venture investing dipped by 13%.
Why Cash is King for Startups
The amount of money needed to keep a startup going depends on production costs, operational costs, and how much the founder or founders can put in from their personal accounts. Venture capital raised before launch creates a strong foundation for startups to begin operations. However, the current crisis across the globe has changed the game.
Production, finding clients, landing clients, and waiting for payments play into a business’s net income. All company costs are subtracted from total revenue accrued by sales to produce net income. Net income is where profitability is measured and what investors look for, but profitability and cash aren’t interchangeable.
Profit Isn’t Cash
A company can have profitability without having a handle on cash flow. Making revenue based on credit sales looks good on paper, but at the end of the day, profit doesn’t keep the lights on.
When you make a profit, it is recycled back into the business or shared between investors and the company’s owner. With inflation and interest rates skyrocketing, the chances of profit holding up startups alone are slim to none.
Debts that stockpile interest can bleed a company dry, primarily if the burn rate is too high. COGS can eat up a startup’s runway; paying customers can suddenly cut ties due to the recession. Cash is king in a startup business because it is the single infallible method of paying vendors, debts, and all operating expenses when revenue takes a hit.
Founder’s Debt Effects Business
Founders taking out loans in their name or using personal credit cards to put money into their startup isn’t unheard of. You need to remember that debt racks up quickly, and without access to a cash balance to pay off loans, your business can deteriorate before hitting a year due to unpaid bank loans.
How To Protect Your Cash Reserves
Cash is king, so protect it like true royalty, especially during a financial crisis. Cash on hand pays the bills, covers emergency costs, and affirms your business will be here for the long term. Cash flow fluctuates, but that isn’t a bad thing. You can always change your budgets to reflect the current state of your cash flow or monitor your numbers diligently to keep your cash flow on your radar.
Below are 3 ways that we recommend protecting, monitoring, and increasing your cash flow.
Reign In Your Cash
To get a handle on your cash outflow, halt hiring. Put employees with experience in multiple fields to work. Give them more responsibility for the short term. As a founder, you will have to take on more responsibility. Be the captain that keeps the ship afloat while keeping open communication with your employees. Don’t overload your team but express the importance of working together to cover what’s needed.
Monitor Your Burn Rate
Burn rate is a killer of startup cash. You have to spend money to make money, but you can’t spend money at a faster rate than what is coming in. Investors typically look at profitability and still will, but they look at burn rate with the same microscope.
Operational costs could cause a high burn rate if operating expenses are unnaturally high. High production costs and low revenue from sales affect burn rate negatively too. When production is at a high and income continues to decline, burn rate increases exponentially. Focus on cuts to operation and production costs to alleviate the strain on your burn rate.
Watch Your Runway
Look at your runway for next week, next month, and next quarter. Can you make it to those dates? Using forecasting tools, like a cash flow forecast sheet, is the best way to evaluate how much time you have left until your company runs out of cash.
Investors are still willing to put money forward but don’t expect a considerable lump sum. Speak honestly and openly about where your company’s financial standing is heading. Plan together how to tackle these problems head-on with the available cash and funding they can provide.
Cash Is King For All Startups
Revenue and income reports provide necessary details for a company’s financial situation. Consistent tracking and accurate reporting is the only way to keep a tight hold on your cash flow. Attaining numbers from your bookkeeper when the month has ended can be detrimental during an economic downturn.
Zeni Inc. provides back-office financial services which include Bookkeeping Services, CFO Services and Controller Services. Zeni Inc. is not a public accounting firm and does not provide public accounting services.