Cash Management In Startups
When I was in my mid-20s and had just gotten a job in venture capital, I read a piece on Alan Shugart, the larger than life founder of Seagate, one of the most successful disk drive companies. Alan was quoted as saying that “cash is more important than your mother.” That got my attention because mothers are really important.
Over the years, I have learned what Alan meant. Cash is everything in a startup. It is the fuel that keeps the car running. And startups fail largely because they run out of cash.
I was working with one of our portfolio companies yesterday on a cash forecasting model, a practice that I strongly recommend and appreciate greatly.
Forecasting cash is more art than science, particularly in a growing company where there are all sorts of unpredictable things (revenue, infrastructure costs, hiring pace, receivables, etc).
But like all practices, it is about the practice. You have to engage in cash forecasting, you have to engage in it regularly, you have to adapt to changing conditions on the ground, and you have to internalize the puts and takes and their impact on operations.
When a company gets mature in their business operations, has repeatable revenues, and has a strong balance sheet, you can run the business based on an annual plan or a semi-annual plan.
But early on in a company’s life, you are going to have to operate on an ever changing plan. If the revenues are coming in more slowly, you hire more slowly. If you want to wait another six months to raise more capital, you have to buy that time with changes to the operating model.
That is the back and forth between cash management/forecasting and operating. They go hand in hand.
It all starts with a cash forecasting model. It looks like a forward-looking profit and loss statement. But you do it on a cash basis. And you include balance sheet items like security deposits, equipment purchases, etc in it. Think of it as forecasting your checking account over the next year.
Once you have that, you need to engage in updating the model regularly and it is ideal to do that as a team, or at least with parts of the team, in the room. That makes it abundantly clear to everyone how operational decisions impact cash and runway.
I like a weekly cadence to this process and I like it to happen with the key senior leaders in the room. That may feel like wasting people’s time. But cash is more important than your mother in a startup, so managing it is never a waste of time.