Think like a CFO - money management hacks for the Start-up CEO
You have a newly formed business and all your concentration is on building that — as it should be. Some of us may have a formal accounting degree or people on board who has financial training. Undoubtedly, one of the biggest factors for business sustainability is streamlining cash flows. It’s a simple term with large consequences, if ignored or ill-managed.
A lot of early stage businesses go to an accountant at the year- end and get a set of books hastily done for tax filing. That’s really not the best solution to aligning your numbers with your business goals. Ultimately it all comes down to being cash positive (meaning you have a bank balance to run your business the way you want to). I say “cash positive” and not “profitable” simply because profits on the P&L is not your best indicator of business success.
A business inevitably has a CEO. I believe a person looking at your numbers constantly, in a non-emotional way is important. Let me explain, as a founder, you have an emotional connection to the business — it’s your baby and as any good parent, you tend to make excuses for shortfalls. I know — I’ve been there, done that. Emotionally separating yourself from your numbers gives you a measurable metric to gauge your business growth. Your numbers are the fundamental indicators that show the real picture in black and white.
Here are a few start-ups hacks for founders/founder CEOs to think like a CFO. (if you have the capacity to get one — even part-time! don’t hesitate). This is at best scratching the surface, nonetheless I hope there are a few takeaways.
1. Managing cash flows — Liquidity is the ability to pay off debts quickly. That’s how I see it. It can be with cash reserves or assets that can be converted to cash fast. Building customers is difficult, time-consuming, hard work that frustrates the best of us. And when we land one — we get over enthusiastic and give them a discount. First off — no discounts. A lot of start-ups get this right. You want to give them a payment plan. Herein lies the problem. You don’t want to lock out those funds for periods longer than when your payments are due.
If you are in the services industry, the biggest expense you likely have are salaries. Payable every 30 days. If you fix up a credit term with your customers that is longer than a 30-day period, you’re essentially funding that expense from capital. It’s a diluted explanation, but that’s the crux of the matter. Don’t confuse working capital with being able to pay expenses from revenue. If you have an industry model where advance payments are the norm, go with the flow.
2. Controlling Costs — Positive revenues usually get you a cash surplus — so does controlling costs. When starting up, some costs can’t be done away with. The idea is to control them as much as possible, not being stingy and give a shoddy air around your business. Have a website, spend on marketing and employees. Outsource tasks than getting them done internally at a higher cost . For instance, if you are a social media marketing company, likely you get your SEO work done internally. Gauge the time taken to complete this task. You might surprise yourself at the time your billable staff might be spending on this. Another business might get this done at a fraction of the cost.
Time cost is an ignored concept. As a founder, you spend so much time on business branding and client acquisition without attributing a cost to it. You want to measure your own cost and concentrate on areas that are generating repeated value.
3. A look into the future — After the initial months’ of running the business, having a real time understanding of cash consumption is critical. Spend sometime looking at the current revenue and expense make-up. Ask the questions — if we continue on the same path, will the business make more money or stagnate financially? Having targets for yourself and early staff members is a good idea. This doesn’t have to be in a rigid, uncompromising way. It can be an inclusive and logical exercise. Set aside a day a month as a “cash ideas” day — you merely look at the current trend within the company. Compare this with industry standards and see where you can improve.
Some products are new — for e.g. a fintech product that’s highly innovative may not have many competitors. So drawing up scenarios against market trends is tricky. In such cases the easiest thing would be to define what percentage of sales should be converted to profits. Perhaps 10% or 20%. So you have a revenue target and a profit target. Now re look at everything in between.
4. Tax is a reality
The last thing I should worry about is tax — isn’t it? After all it’ll be a while before my business makes profits. While that might be true, any sort of tax savings now or in the future is a source of funds.
Fact — managing funds is a major CFO function. Myth — thinking this means only equity and debt. If your business is incurring legitimate expenses, those should be part of your books. Even if you are the one doing the spending. Any loss you are making in the first few years would have the capacity to be carried forward. Most countries in the world have tax provisions for this. When the company makes profits that will be taxed, any losses from previous year can be netted off against this. Where you would be paying taxes, there could be savings.
Apart from this — have some idea of tax breaks you would be able to get as a start-up. Innovation credits, Reimbursements for research and developmentetc are some examples. They are all sources of cash — definitely smaller than a funding round, but cash still!
Ultimately it’s the big picture that matters. How do you conduct yourself holistically is the differentiation between a good business and a great business. As a CEO you need to have some CFO insights. At the least, it would tell you when you’re ready to hire that person for your business. Have fun studying the numbers!
1. The article was originally published on Medium.com
2. All pictures used are from the Wix Gallery