Saturday, February 11, 2012

Cash flow management for a startup – learning to be frugal


Money doesn’t grow on trees, and for many startups the expenses that go with establishing a business come as a shock. The delays in revenues come as an even bigger shock.

Here are some of the key things to remember.

It will cost three times as much and take three times as long as you think.

This old saying is a reminder that you will either need to save more than you think before you start, and that you need to start looking for income or investment in your company as soon as you can. Also, forgive yourself for not meeting your ambitious schedule that wasn’t tempered against suppliers or the market.

Flog product as soon as you can

You may have grand plans for your ultimate product, but I guarantee that you will go bankrupt before it is ever developed. Products are always a work in progress. Always remember that your product needs to satisfy your customer first, and you second.

None of this is suggesting or recommending selling inferior products, only that you sell products that meet your customer’s needs.

On TV we are often treated to tales of people who stick relentlessly to their vision of product and quality and have reaped the benefits in the long run. Fine, yes a few do succeed, but you have a better chance of winning the lotto than doing this.

The people who do succeed like this tend to be artisans for whom there is a small but rich clientel willing to pay for the product.  You also need to have a decent amount of experience, the ability to deliver on your visions of perfection and an ability to ignore the fact that you are out on your own.

The market will tell you what is working or not, and you will very rapidly start adapting your business model and product to match.

In other words, you need to make money to pay for improvements to your product, and you can’t do that unless you are selling product.

Spend as little money as possible

To start a business nowadays you need a website, email address, a business card and a company. This should only cost a couple of grand.  I would have said computer, but as of the last year or so you can probably run your business on internet based software (SAAS) without even owning a computer if you really wanted to.

Wait till later to reward yourself.

Spend money on the product or experience

A typical trap for a startup is overcapitalisation. You pay too much for everything up front to build what you think is the way to run a business.

Stick to this rule – ‘If it doesn’t genuinely make a difference to the customer experience or genuinely help staff retention, safety and productivity, then don’t spend it.’

Here are some tips on saving money: 
  1. Office and business premises are expensive, so work from home for as long as you can. Use telecommuting tools and online collaboration tools.
  2. Pay a bit more for an unlimited phone plan.
  3. If you are embarrassed by your car, catch a cab to important meetings or park your car round the corner and walk a bit further.
  4. Spend time doing research yourself rather than paying advisors where you can. As the owner you have a vested interest in making things work, and your time is effectively free as long as you aren’t neglecting sales. So ask around for pointers, but do the heavy lifting yourself to save money.
  5. Pay for a virtual office address. Sadly, many buyers feel weird about dealing with people working from home and this is why there are companies who will answer the phone for you, collect your mail and offer meeting rooms for clients.
  6. Meet people in good cafes rather than in your home office or tatty cheap meeting room.
  7. Meeting rooms, showrooms, retail space and the reception areas should always be professional looking, very clean and welcoming. If you don’t take anyone behind this façade it can be held together with sticky tape and string as long as it works.
  8. Use public transport where you can and always but always travel economy class. If you really want to be fresh for that important meeting then it is often cheaper to fly economy class the day before and stay at a hotel for the night. 
Counter examples include: 
  • Paying the money to be located near the majority of your potential customer base could be the best investment you make.
  • Make sure your website looks great and functions well.
  • Don’t skimp on IT for knowledge workers -  I make sure my team get a decent lightweight laptop with a good internet connection and current software.
  • Allow people to personalise their work space a bit. That element of choice can make a big difference to morale.


Always bill on time

Yes, this is obvious, but when you are in the time consuming business of a startup invoicing can take second place to more urgent work – after all they have a contractual obligation to pay don’t they.

This is true to a certain degree and can work while you have a decent amount of credit available. The issue here is that the timing of revenues and expenses don’t match.

For example in my own business I pay my staff every two weeks and invoice monthly. In practice this means that I receive cash up to 6 weeks after I pay my staff. If I delay invoices by a week, then in many large companies this means that I am now allocated to the following months invoices, and I will then be 10 weeks out of sync. If you have large expenses this timing mismatch will kill your business faster than anything else.

The second reason for billing on time is more psychological. If you bill late you are effectively saying to your customers that you don’t care so much about money and that they can pay you late too.

The old rule is that if you act like you’ll get paid then you will. I have learned the hard way how true this is.

Learn to think short term to reduce locking yourself into longer term risks

Lease equipment at the start. Sure the monthly bill may be high, but you get to sign up a short term contract, or even take equipment on an as needs basis.

For physical products use rapid prototyping or other higher unit cost, short product run methods for your initial product. The reason being is that it the capital costs are a lot lower. You don’t want to spend $30,000 on tooling dies when you can print your product on a 3D printer or use a slower more labour intensive method.  Many of the truly cheap unit cost manufacturing technologies require you to make many thousands of your product. This can be the kiss of death to startups as it is pretty much guaranteed that your first design or two are not going to be as popular with the market as you think.

There are also manufacturers who specialise in short product runs and prototype manufacturing for complex goods. They spend a lot of money on equipment and sell their high quality services to a wide range of clients.

Use local IT people for any complicated web based business where you can. The reason for this is that you can have that face to face interaction and spend time with them to learn what the problems are and sort them out. Yes, this is a lot more expensive that hiring people out of India, Ukraine, the Czech Republic or so on, however, it makes the process smoother and brings local cultural sensibilities to design and wording.

Keep on being frugal

I could keep going on this topic, but you get the essence of it now. Learn to be cheap where it doesn’t matter and you will do better.

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