Financial management is the heartbeat of every business. However, a start-up or scale-up will focus completely different aspects to an established company. Additionally, many starters and growing businesses tend to underestimate the importance of financial management. They either lack time, or staff with sufficient financial background and expertise. “Cash – and primarily a lack thereof – ensures that many good starters or growing companies run into problems and, at worst, even have to close down their business,” researcher Yannick Dillen tells us. “And that is a great pity.”
Financial Management was the main topic of the most recent ‘Vlerick Venture Talks’, a series of free inspiration sessions where entrepreneurs can share their experience with current students and alumni. The insights were provided this time by speakers including Executive MBA alumnus Joris Noreillie. As a freelance CFO, he handles financial management for various start-ups and scale-ups.
There is a big difference between the financing policy of a mature SME and that of a starter or growing business. “Start-ups and scale-ups must be particularly vigilant with regard to their investor relations, financing, KPIs, cash flow and working capital,” clarifies Yannick. “In terms of financial management, established companies focus more explicitly on aspects like their dividend policy, treasury, audits, taxes, banking relationships, investments, governance, risk management, M&A and internationalisation. Of course, cash management remains an important issue for them, but has already become sufficiently embedded within the organisation.”
1/ Draw up financial KPIs
It is very important to draw up budgets in an early phase of your business, and to set down clear financial goals. This is particularly true because, as a start-up or scale-up, you face substantial uncertainty – in aspects such as identifying your client base, for example. Drawing up KPIs is crucial for determining your financial health. Looking only at the number of new clients or your turnover is simply not enough.
2/ Retain control of your working capital
Make sure that you check and monitor your working capital on a daily basis. Stock management is a factor that should not be neglected here. If you retain too much stock, your money is tied up in products while you might need it for other purposes at that point in time. And if your working capital is too low or goes into the red, you may even be approaching bankruptcy. Your working capital is a crucial element for survival.
3/ Know your own runway
How long can you survive on your current capital? Companies that have been established longer have sufficient collateral to apply to a bank when they need more funds. However, as a start-up or scale-up, the end of your runway often also means the end of your business: when this has been reached, you may have to close down. Good cash management can substantially lengthen your runway.
4/ Know your business model
No two business models are alike. Some business models use more cash than others. If yours is based on a platform, for example, you will consume less cash once your platform is operational. You will have marketing costs, of course, but your platform can run without personnel. On the other hand, you might have an e-commerce business model for which you do need staff. Generally speaking, the faster you grow, the more people you need. And people cost money. That makes it a good idea to be thoroughly aware of how cash-consuming your business model is.
5/ Understand the importance of cash
Selling a lot does not automatically mean that your company’s bank account is bursting with cash. All your energy will often go into developing products and services and into sales. You may be able to make a lot of sales and sign lots of contracts, but it is just as important to focus on follow-up to check that your clients pay their bills (and that they do so on time). If they don’t, your costs could run sky-high, resulting in substantial cash flow problems. Reeling in five new clients does not immediately translate into cash, and this is a step that many entrepreneurs tend to forget.
6/ Avoid bringing new investors on board too quickly
Attracting new investors is a positive development, and also crucial to growth. However, you should avoid having to organise a new financing round too quickly, particularly if this is only to close a financial gap. When new investors come on board at your business, your own share percentage will automatically drop. You will be relinquishing partial control to someone else. So it would be a pity if you had to seek new funding simply because you did not pay enough attention to sound financial management and cash forecasting. Do you still need fresh money? Don’t engage the services of someone else to seek it for you, but do it yourself and make sure to forge close ties with your new investors.
Source: Vlerick Business School