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You’ve raised! Congratulations. What steps should you take to properly manage your cash?

After a long period of hard work on the fundraising process, with countless emails, introductions, meetings, pitches, term sheets (hopefully!), due diligence, documentation, sign-off… finally, the money hits the bank 🤑. Now what? (hint: don’t do this)


The funding round was successful because the team, product and business plan convinced investors that you would make the most of their investment. At this stage, delivering the product road map, growing sales, and expanding to new markets will likely mean increasing cash burn.  The main drivers of higher spend after a round are:  increases in personnel expenses, higher marketing and additional tech stack and server costs. There can also be €30-100k of costs surrounding the round itself (legal/DD fees or other excess expenses accrued in anticipation of the raise). 


Disciplined cash management is paramount not just because investors will expect regular tallies of where your cash balance stands relative to expectations, but, more importantly, because cash is a finite resource, deploying it effectively buys you more time to iterate and grow.


Here are 5 best practices for making the best use of your cash:


1. Monitor your performance systematically


Effective financial monitoring is the bedrock of good cash management. You will need both a budget (more on that in our next post) and a way to reconcile actual financial performance to the budget. Without this, none of the rest will help much.


So, after the raise (if not before), build a financial process to monitor the company’s performance on an ongoing basis - this position should be reviewed at least monthly. You should develop a well-defined financial planning and analysis (FP&A) capability internally or using one of the existing tools in the market (ie, Vena, Cube, Datarails, Planful). 


A great first step is performing a detailed analysis of the cash movements. 


For early-stage companies, this could be as simple as downloading bank statements and - line by line - identifying and categorising vendors and customers. If you’re banking with a neobank (such as the business accounts of Revolut or Monzo), this categorisation may be automated - your role will be reviewing and validating the categorisation. As business and volume grows, this can be further automated with BI tools. Once this categorisation is completed, the second step is to use this exercise to generate financial statements. Proper identification and categorization is key to being able to analyse potential gaps and respond appropriately (or, create an updated budget/forecast based on observed trends).


2. Pay attention to cash movements vs income statement


In many cases when you get paid doesn’t correspond to when you are delivering services. For example, you can deliver training over 1 year and get paid over 2 years. Or, in a more ideal situation, you can get paid upfront for a year’s worth of platform access. Similarly, vendors’ payment terms can vary significantly. So, while it is often easier to model revenue and costs as if they happen at the moment of delivery, doing so can be very misleading in projecting runway.


To anticipate actual cash flow, it is important to create an analysis to reconcile the cash movements and the income statement (this should be viewed alongside a controls framework to ensure proper documentation for tax and auditing purposes). This analysis enables you to understand and bridge the two statements, properly model future cash outflows and confirm that all underlying documentation is being properly provided for accounting purposes. By having all documentation properly stored, tax fillings can be properly supported and audit procedures can be less time consuming and stressful. 


3. Optimise procurement and expense approvals


Another process that warrants attention as early as possible is related to approvals and procurement. Initially, companies are heavily dependent on founder approvals for either T&E expenses (travel & entertainment), subscriptions (tech stack) and vendors (i.e, marketing agencies). Nowadays, there are several providers of virtual credit cards to companies, where besides creating a predetermined approval range and process, there is the capability of uploading invoices/contracts. This is key to fostering a lean culture and to educate on the importance of keeping track and documenting expenses. 


4. Consider investing cash you don’t need in the near term 


In terms of expanding runway, one initiative that is worth considering is to actively invest cash in remunerated risk-free deposit accounts. Due to the macroeconomic environment, there are several options for risk-free deposits that can remunerate accounts up to 5% a year. It is true that to actively manage it properly some time will be consumed but in an illustrative scenario of a €2.5m round, where a company expect to spend approximately €1m in the first year, by investing the same amount in an account that can return 3% net after 12 months, the interest income is €30k - even if it does not look like a lot of money, it can definitely extend runway and foster a culture of actively managing the cash position.


5. Align new employee trial periods with financial reporting periods 


We have not yet come across a startup where every hire works out. In many cases, new employees have a trial period and parting ways during the trial period is more cash-efficient. Aligning trial periods with financial reporting periods, particularly when employees’ performance contributes to the results being reported, can help to make these decisions more timely and effective as you have better information before progressing employees to full-time members of the team.


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In such a competitive environment where fundraising for startups is becoming more time-consuming and more scarce, being on top of the cash position and your projections is key to achieving long-term goals. By implementing simple processes, founders can truly understand how the company is performing, what can be expected in the future and demonstrate to stakeholders that they care and are on top of things - one of the worst things that can happen to a startup is to be surprised by an expected lack of liquidity. Survival may depend on it.

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