Cash flow is described as the net amount of cash or cash equivalent being transferred in and out of the business. Lack of understanding about cash flow management can prove to be detrimental to the success of a Start-up. A US-based bank recently conducted a study to ascertain why start-ups that were banking with them failed within five years of establishing. They found out that about 82% of them closed predominantly because of poor cash flow management. Here are a few tips that would help understand and manage cash flow in your business –
Overestimating Future Sales Volume
Though entrepreneurs must have oodles of optimism but it needs to be balanced with objectivity. In a recent study conducted by European Economic Reveal, it has been revealed that optimistic thinkers who are self-employed entrepreneurs often fail because they do not factor inherent and unforeseen challenges in their business plan.
Zoomo (also known as GoZoomo) raised $7 Million in funding for their used car marketplace. They soon found out that despite a promising business model they couldn’t change the perception of trust in the Indian used car market.
Realistic forecasting on hard data, on past sales record, on industry trends is a must and this must be combined with objective intuition to put together a predictive sales projection.
Most often, Startups put too many eggs in one basket and wait for it to hatch. A hundred things could stop or stall the payments and you can’t really spend the money that you don’t yet have. Lavish meals, holidays, dinners and expensive interior decor to keep the employee morale are all fine and nice but do you really have the cash flow to get them done?
Tracking Day-to-Day Cash Flow
Tracking, analysing the numbers and understanding your expenses and cash-flow trends are important. This will tell you which client or customer is paying on time, what expenses are piling up and where you can save money.
Setting up policies and penalties for dues is one way of ensuring that the payments are made on time. Many even go to the level of incentivizing their clients with discounts and offers on their services, just to collect their dues on time.
Buildzar an upcoming B2C marketplace for construction materials based out of Gurgaon was launched in 2015. After raising an initial round of funding of around $4 Million it had to finally shut shop during the demonetization drive.
Real Estate was space where cash ruled the roost and cashless transactions were not done to avoid paying taxes. Demonetization derailed this industry, Buildzar and their clients needed time to adjust to the new ecosystem that was put into place. Sadly, Buildzar didn’t have a safety net to fall back on so they had to close.
A safety net doesn’t mean just extra cash it needs to be sufficient enough to cover the basic expenses of the company including infrastructure costs, salaries, power etc. for over two or three months.
High Acquisition Cost and Low Lifetime Value
PepperTap, a Gurgaon based start-up wanted to be first among the on-demand grocery delivery services in India. Founded in 2015, this hyperlocal grocery delivery start-up raised over $50 million in the first round and over $36 million in the second round. Within just a year of launching the start-up, they had to close shop.
The reason for closing the operations was summed up by its founder Naveneet Singh, “We operated on a negative margin per delivery, and in such a scenario, the path to profitability looked very distant – at least two to three years,”
Acquisition costs don’t merely include extra expenses undertaken for a client, one needs to factor in the time spent by the sales executive, travel expenses, mobile and internet costs, sales person’s salary, commissions etc. Many startups make the rookie mistake of incurring high acquisition cost for clients who have a low lifetime value. Lifetime value of a client basically refers to the projected revenue that can be potentially made from them. This will give you a better insight into whether the client is worth their acquisition cost.
Starting a new business is a huge challenge. You need a rock-solid idea, a sustainable business model, the right team, and great execution for a start-up to begin. The above examples shows that possibilities of success are as high as the challenges that exist in this ecosystem. Cash-flow management is probably the only element that can be controlled in this landscape.