The Cash Flow Manifesto

Cash is the lifeblood of an early-stage startup. Improperly managed cash flow will take down a startup before it's had the chance to grow.

The Cash Flow Manifesto
The Cash Flow Manifesto

Cash is the lifeblood of an early-stage startup. Improperly managed cash flow will take down a startup before it's had the chance to grow. Don’t assume that your team will be able to raise another round if the bank account runs dry. An optimized cash flow management process from the outset will prevent you from ending up in the startup graveyard. Here is our cash flow manifesto.

Establish Spending Habits Early On

  • In the early days, spending should be formally reviewed weekly. This process can be moved to a monthly reconciliation process once the business has established consistent revenue and operating expenses. But in the early days, this meeting will emphasize how important cash is to the business.
  • Until your revenue and operating expenses are growing in predictable tandem, rely on zero-based budgeting. Zero-based budgeting is a method by which all expenses need justification before cash will be allocated.
  • Use corporate spend management tools like Brex or Divvy.
  • Clearly communicate corporate policy in easily accessible, readable documents. Ensure all employees understand what, and how, things are to be paid for during ordinary business.

Automate Accounts Receivable

  • While accounts receivable (AR) are technically considered an asset on the balance sheet, they are a potential point of cash flow risk for a company. Automate follow ups on all outstanding invoices and provide clear ways to receive payments. Depending on the market you sell into, consider simple payment processing via Stripe.
  • Negative cash conversion cycles can act as a cash flow flywheel. Cash conversion cycles represent the time between when an invoice for a service or good is paid and the time required to pay for providing such service. In other words, negative cash conversion cycles imply you are able to keep cash on the books for a longer period of time. This is a good thing and will allow you to re-invest cash sitting on your balance sheet before having to send it out to a vendor.
  • Avoid perpetual discounting when possible. It is a good idea to offer early customers and partners discounts in exchange for working with your new company, but avoid overbearing language that might lead to a long-term drag on your top line. Oftentimes startups feel they lack the leverage to raise prices, but in reality, customers willing to pay $1 dollar will generally be willing to pay $2. Keep discounted contract periods to brief and clear timelines and set a standard of raising prices annually.

Be Tactical About Accounts Payable

  • Accounts payable (AP), often considered a liability, can also be a boon for a startup if managed properly. When negotiating with vendors, ask for payment terms as far out as possible. As a general rule, you never want to be paying anything sooner than Net 30 (30 days from invoice date) and you certainly do not want to be paying COD (cash on delivery). Personally, I always seek a minimum of Net 45 terms and occasionally push my luck by requesting Net 90 or Net 120.
  • Request invoices for all services rendered or purchased when available. This may not always be available, but don’t shy away from asking for special treatment from a vendor.

Build Cash Reserves

  • If you are raising a round, allocate 3 months of burn (Payroll + Rent + OpEx) to your balance sheet for a rainy day.
  • Forecasting cash flow works up to a point. To be of any value, modeling future cash flow must account for different scenarios.
  • Seek being default alive. This does not need to mean running at profitability. It simply implies you should focus on keeping burn rate low enough to last you in the order of years and not months.

Get Professional Help

  • Try working with a bookkeeper from day one. Companies like Bench and Pilot can be great stand-ins before you are ready to make a full-time hire. At the very least, rely on bookkeepers to provide you with a cash flow analysis monthly.
  • Spend time educating yourself on the three financial statements and accounting basics. As a resource, I strongly recommend the courses available at A Simple Model. While outsourcing some work can be beneficial, at the end of the day, the leadership team of the startup (specifically the CEO and CFO) is responsible for the financial well-being of your company. Do not assume your accountant or bookkeeper is taking care of everything or you will find yourself in very dangerous waters.

Build process from day one around managing cash flows. Set a weekly meeting to review your P&L, implement corporate spending policies, and automate where possible. Invest in financial literacy immediately, it will pay dividends. Don’t forget that cash is king.