• Alex, Head of Finance at MultiPass


• 13.04.2022 03:15 pm
#finance #startup

Sustainable Growth Startup: Key financial aspects every successful startup owner should be aware of

”So, you are running a promising startup, have investments flowing in and you’ve reached a stable revenue. There’s no trouble looming on the horizon and you’ve become confident and started splashing out on developing your business idea. This is the exact time to become aware of the cash flow pitfalls that could jeopardise your business survival in next to no time”, Alex Goba, Head of Finance at MultiPass – a FinTech company that has long outgrown the “startup” phase – outlines some basics of financial management that every SME owner should keep in mind when ready to scale their business rapidly. 

Be your own bank: take control over vendor management

Timing of operational cash flow is critical. Start by reviewing your income and expenses – everything from the amount to the dates when you need to pay your suppliers, contractors, electricity and broadband bills, etc. One of the common problems comes from the fact that some incoming funds, especially high-value payments are collected over a long period of time, while most operating expenses such as salaries, rent, broadband, etc. should be paid monthly. 

Your Accounts receivable is the important metric you should track and understand here – it’s the amount of money your customers owe you for the products or services they’ve received but not yet paid for. Review the agreements, talk to your vendors and agree on the dates they invoice you. Do the same with your clients and make sure to set payment terms clear and favorable to your operational cash flow. You should plan your it so that there’s operating funds available on your account at any given time, thus avoiding any need for credit lines to support your business cash flow needs. 

Every day your customer owes you is an added pressure on your financial health. Some of the ways you can improve your days payable metrics is automating the collection of funds with Direct Debit, sending scheduled emails or SMS reminders on due payments to your customers as well as making follow-up calls.

Don't let the FX markets impact your business

Companies dealing with several currencies need to take into account the risk of FX volatility. Sometimes holding your funds in an unstable currency can result in a sudden loss of their value. We've just seen this with the Russian ruble, which according to Bloomberg, has dropped by a staggering 40% this year following the Russia-Ukraine crisis. 

Your exposure to foreign exchange volatility, however, can be optimised by hedging. There are various FX dealing approaches for businesses on the market nowadays. From complex FX tools with forecasts, rate tracking and booking features for experienced traders to user-friendly comprehensive solutions such as MultiPass payment accounts with an in-built currency conversion feature for instant movement of funds between your own accounts held in different currencies. Avoid unknown FX fluctuations in the future by holding cash assets in the core currencies of your business operations as well as always keep an eye on opportunities to offset revenue/expense streams that can be settled within the same currency.

Know your investors

Keep in mind that founding investor money injections are not endless. There comes a day when your startup eventually runs out of it, so you need to have a thought-out strategy for financing your business by then. Practically your investors can range from shareholders to banks providing you loans, and even to vendors allowing you to pay significantly later than the service provision date. You may consider finding new investors, applying for government support schemes, taking a business loan or maybe even starting a crowdfunding campaign. 

Estimate your break-even, the revenues you are generating and how much of it you can actually spend on your product development to keep a healthy cash flow. Then you will understand how much capital you lack, and whether your need a long-term funding solution or a smaller loan to stay active those few months before your next round of investment. Evaluate risks and your ability to pay back to find the best solution. Moreover, keeping stable operational cashflows will be a great negotiation point when applying for corporate loans, thus acquiring necessary additional funding for future growth as well as reducing dilution of your existing shareholder equity.

Cash is king: build a cash cushion

Another good financial management practice is to always keep some surplus of money ‘for a rainy day’. It is something that can help you win a bit of time to rework your business strategy and react to unforeseeable events, such as the pandemic that, according to a study by National Bureau of Economic Research, increased the SMEs failure rate by 9% in 2020 and would have nearly doubled it in the absence of government support. The good practice is to have cash reserves to cover up to a few months of operational cash needs, which would give you enough time to negotiate additional funding without disrupting core business processes.

To conclude: great business ideas come to people no matter their age, profession and experience. Noone expects novice entrepreneurs to all have a grade in economics, however, hiring highly paid financial advisors might not seem like the best money spent especially for the very early-stage startups. Nonetheless, keeping in mind these basic cash flow management principles could help you reduce cash shortage pitfalls on your journey to becoming the next big unicorn.