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Running out of funds is the single biggest killer of startups, that’s why understanding what to focus on and how to manage cash flow are essential to achieving profitability. To determine what changes can be made to ensure a bright future for your business, you first need to identify what the pain points are. In this blog post, we will help you identify these points to ensure that your cash flow in the pre-revenue generation phase in preserved and post revenue generation your fixed overheads are covered by sufficient sales/gross profit.
What you should do at the pre-revenue stage
Polish up your product or service
At the pre-revenue stage, it’s crucial to ensure that your product or service has the potential to generate significant revenue. Now, before you start to groan at the thought of having a flawless design, you will be relieved to hear the following: You don’t need to have the perfect product or service. However, you do need it to be on the road to viability, captivating the funders imagination so they can help lift you off the ground.
Manage your cash flow
During this period, it’s also important to manage your cash flow by limiting expenditures to absolute necessities. Take this time to really zone in on what resources are dedicated solely to product or service development so you can make the appropriate cutbacks. To do so, establish a clear connection between your budget and your strategic priorities; you will have very little success if your budget does not reflect your priorities. Therefore, it’s critical to evaluate the strategic implications of your current spending habits. For instance, consider expenditures as an investment over a number of years with differentiating qualities that will support the execution of your company’s goal, rather than just an annual expense. Examples of expenditures to consider include office rentals (Microsoft started in a garage), leased equipment, and delegating control over the checkbook which will help you to avoid overheads.
When it comes to your funding source, whether it’s family or a round one investor, or both – cash resources need to be stretched to the point of demonstrating progress in the development. This generally entails no salaries for principals meanwhile employees typically receive payment in kind, such as shares. To add on, although it may be tempting, discretionary costs at this stage are not advisable. It’s time to bunker down and make the appropriate sacrifices such as cutting back on attending conventions and tradeshows as they will likely be considered a luxury. Other examples of discretionary expenses include marketing, research, as well as travel costs. Capex is generally avoided until volume can support its optimal efficiency versus labour.
What we have learned from startups in recent years
It’s essential for emerging industries to focus on business fundamentals and cash flow. With this in mind, the notion of just managing cash flow to help you attain profitability is false. Cutting down on costs does not ensure that you will necessarily become profitable; you must have sufficient sales to operate as a going concern. This means that there are enough sales and gross profits to cover fixed expenses.
When reflecting on the last several years, startups have shown us that round two investment is not a certainty and funds will dry up with market changes. Cannabis and psychedelics are prime examples of blowing funding on expensive infrastructure and watching the well run dry. As long as funding is uncertain, expansion should be avoided. Early on, profitability is not expected nor desired; rather, it’s important to demonstrate development progress to investors that there may be a pot of gold at the end of the rainbow. In other words, this means that staying power – not profitability – is crucial until the market turns.
What you can do right now
We want to see your business take off. Startups are essential for the economy’s expansion and business ecosystem development. Therefore, the best thing that you can do for the future of your business is to meet with a trusted financial advisor. Zeifmans has decades of experience assisting businesses prosper during unpredictable times. Our team is ready to help you with all of your business needs, contact us at info@zeifmans.ca to get started today.
