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The article underscores the critical importance of cash flow for both fledgling startups and established companies, highlighting the impact of cash on their sustainability. Many successful entrepreneurs have faced severe cash crises, fostering a keen sense of financial management to ensure at least six months of financial visibility to navigate uncertain economic landscapes. Additionally, we discuss the challenges faced by startups pursuing rapid growth, the significance of cash beyond profits, and the necessity of anticipating cash crises well in advance, offering strategies to optimize cash flow, emphasizing the pivotal role it plays in the success of businesses.
E. Krieger
What do a young company seeking financing and a publicly traded biotechnology company required to disclose its cash position to reassure the financial markets have in common? The answer is in the question and almost always points to an extreme sensitivity of these companies and their ecosystem to cash issues.
Some Anglo-Saxon colleagues dare to assert that in entrepreneurship, « Cash is more important than your mother. » To avoid offending all the mothers of the Earth, we will modify this provocative aphorism by saying that your cash is almost as important as your mother, which underscores the significance of the matter.
A Scalded Cat Fears Cold Water
When their company becomes prosperous and well-equipped with a solid cash cushion, many entrepreneurs confess afterward that they have been on the brink of a cash crisis multiple times, which has instilled in them solid financial management reflexes.
For example, a CEO traumatized by a financial group’s attempt to take control of his SME during serious cash flow tensions now ensures a minimum of 6 months of financial visibility, regardless of the economic climate. This visibility allows them to cover all operating expenses without any additional financial inflow, ensuring they can adapt to any circumstances.
However, this financial visibility is never guaranteed for startups dedicated to hyper-growth. Their structural cash needs are linked to technical and commercial overinvestments aimed at quickly achieving significant size to monetize their competitive position, usually by selling to a larger corporation.
Profitability Alone is Insufficient
Studies from the investment bank Avolta on the performance of startups funded by venture capital funds indicate that at the time of their resale, now situated 9 years after their creation (median time), nearly 50% of these companies are not profitable. When you add these deficit operating results to capital expenditures (Capex) and change in working capital requirements, it becomes clear that pressure on startups’ cash flow is an endemic phenomenon.
This is not a problem in absolute terms as long as investors have faith in the management and its ability to create a « derisking machine » that is both very appealing and potentially threatening to industrial leaders who will be more inclined to acquire such a company.
However, when dealing with more traditional SMEs that do not frequently seek investors, another adage prevails: « Sales are vanity, profit is sanity, cash is reality. » Instead of boasting about profits and, even more so, revenue alone, the true measure of a company’s health is often its available cash.
Anticipating Cash Crises More Than 6 Months in Advance
Like the entrepreneur who was scalded by a cash crisis that almost cost him his CEO mandate, it is important to anticipate potential cash flow issues more than 6 months in advance for several reasons:
- Firstly, because it takes several months, and sometimes even a year, to raise capital, especially when the economic and financial climate is less optimistic.
- If your cash flow is insufficient, your credibility may be compromised, and your negotiating position with potential partners, especially funders, will be highly uncomfortable.
- When such fundraising is not possible, it allows for the restructuring of the company and the avoidance of the trauma of insolvency and bankruptcy.
When focusing on young companies, several strategies exist to optimize their cash flow at the outset and reduce or vary their fixed costs.
To ensure more than six months of cash visibility, it is useful to prospect well before the company’s creation and industrialize your sales efforts before the product itself. Beyond operational margins, optimizing working capital requirements is often a highly productive endeavor. If your offer is well-received by customers, there’s no reason to grant them exorbitant payment terms, which will increase working capital requirements further if your sales grow rapidly.
Entrepreneurs who have faced cash flow crises understand the virtues of anticipation in hindsight and then join the ranks of proponents of these impactful and enlightening sayings about cash – almost as important as a mother.
Anticipating and optimizing cash flow result from both a virtuous economic model and day-to-day work, where sales efforts and expense prioritization are key.
