Tips For Modeling & Managing Cash Flow

Written by Sean Murphy. Posted in skmurphy

There were a number of excellent suggestions from last  Tuesday’s Bootstrapper Breakfast with Rick Kadet on managing and modeling your cash flow.

Rick Kadet opened with  some good points about common mistakes founders make in modeling and managing cash flow:

  • They can focus too much on the current bank balance  and burn rate and neglect other cash commitments that flow from decisions that they have made: for example hiring your first employee or moving into a full time office can create a number additional expenses.
  • Forecasts, both for when a feature will be complete that may drive additional revenue and when a customer will close (and pay), are important and difficult. Because of this founders may neglect getting better at feature roadmap management or sales forecasting and inadvertently lose control of their destiny.
  • To avoid misunderstandings among the founding team, it’s important that a monthly balance sheet and income statement as well as a sources and uses of funds be prepared and reviewed as a group. This is in addition to reviewing the sales funnel and the development roadmap.
  • Also see Rick’s  “Bootstrappers Benefit From a Simple Financial Model” and his  notes on  “Good Cash Management Practices

There were a number of excellent observations and suggestions from attendees:

  • A startup is like a jet fighter, you have to be looking ahead to see what’s coming so that you can react. For example, if you are going to run out of funds at your current burn rate in three months and your sales cycle has been running six months from first contact you need to change something now. Start contacting more people, understand why they are falling out of the funnel, cut your burn rate.
  • If you are planning on seeking investment one of the most important things an investor is going to want to know is not how you will spend the money but your plans to pay them back with enough extra to meet their target rate of return.
  • Just because some of your customers are taking longer to pay, don’t make the mistake of slow paying employees (e.g. expense reimbursements or worse, salary) or smaller suppliers or contractors. Especially in a recession it’s better to negotiate  a more  favorable rate and pay promptly than to stretch out payments to earn interest on the funds.
  • Often a 2% discount for payment within ten or fifteen days will do more to get a larger firm to pay promptly than almost anything else.
  • If someone is working without pay they are effectively an investor. Keep lines of communication open, be clear what the financial situation is, and respect their investment.
  • Quickbooks is a good solution for managing the accounts for a startup. A shoebox full of receipts or a simple Excel model is probably not sufficient.
  • When it comes to financial arrangements it’s always a good idea to both shake hands on the deal but put it in writing to reduce the risk of miscommunication and misunderstandings. This applies equally to intra-company arrangements as dealings with outside consultants or suppliers.

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