Karen de Meza, Portfolio Director at Maven, looks at how early stage investee businesses struggle to balance the growth of their business with having sufficient cash available to implement their strategy and suggests some practical tips to help.
As an entrepreneur with a novel business idea you’d be well served to take heed of the Greatest Showman’s adage that “money is a terrible master but an excellent servant”.
Balancing the execution and delivery of your plans with the management of your cash is the real trick to having a successful business, particularly one that investors would be willing to back. The old adage that “Cash is King” was coined in the late eighties, attributed to former Volvo CEO Pehr G Gyllenhammer, who made the point when discussing the global stock market crash of 1987. He observed that those companies with ample cash reserves weathered the storm better than those who had exhibited poor cash management.
Availability of working capital to fuel growth is probably the most important factor in the success and survival of any early-stage business, particularly those that are at primary stages of revenue generation. Even when a business is generating reasonable levels of revenue, it can be profitable on paper, but if it expands too quickly and too much cash is tied up in assets, then cash resources will be strained, and a business can fail through over-trading.
As an investor in early-stage businesses, Maven pays close attention to the rate at which cash is being consumed by investee businesses, especially in relation to milestones that are achieved, compared to those in the original funding proposal presented. We also need to understand what the future cash requirements are likely to be, and how the management team tackle the challenge of balancing results delivered versus cash spent.
The investment process is often rigorous and time-consuming. Once you’ve secured funding, you have a pot of cash available to bring your business plan to life. Now is the time to set up monitoring plans and achievement milestones to reassure your investment partner that their money is in safe hands.
It is at this stage that it is essential to develop a 12 week rolling cash flow, best placed working in tandem with the 100-day plan. After the first 100 days have passed, how you ration cash needs to align to your objectives and be measured alongside other Key Performance Indicators (KPI’s) set as milestones to manage growth.
Businesses usually encounter a variety of issues and how you deal with these as a team, will facilitate a better knowledge and understanding of the business, which you can communicate to all stakeholders. It will also have an influence on whether an investor is willing to commit additional funds to continue to support the growth of the business.
As ringmaster, the Chairman or CEO should agree objectives for the team that need to be achieved to deliver growth, typically they will be:
Sales – targets for sales delivered including key customer acquisitions, market penetration, level of recurring revenue, qualified pipeline value (order book and prospects)
Product development– objectives relating to stages of progress, customer feedback and accreditations
People related – to include building a team and key appointments
Commercial – reviewing terms with suppliers and the basis on which the supply chain and sales delivery are both negotiated, documented and delivered.
It’s crucial that decision hurdles are set in your business as early as possible, which facilitate a controlled and managed pathway of cash release, particularly for larger items of expenditure. In all four areas it is essential to monitor the consumption of cash closely, and be able to demonstrate tight control of spending, particularly if there are areas that are running behind target. Where delivery is not as anticipated, it’s important to take early course corrective actions to ration funds to create the most value in the business, if you do and communicate those positive actions to your funders, then it will inspire confidence in your ability as a management team.