The axiom ‘cash is king’ is there for a reason. That’s because most businesses fail because they run out of cash.
Even businesses that are generating revenue, creating profitability and growing are at risk of bankruptcy if they mismanage their cash flow.
Even venture capital firms will require startups to do cash flow forecasting in order to know how much ‘runway’ their funding will give them. The ‘runway’ is a term to describe how much time a startup has before they run out of cash.
It’s easy to take venture funding and think you now have all the cash in the world to play with. Many founders use the cash to buy unnecessary toys and unnecessary employees.
With that in mind, here are a few ways to conserve cash as a startup. These simple tactics would provide the additional ‘runway’ you need to get your company viable and self-sustaining.
1. Freelancers and Contractors
It’s tempting to go out and immediately hire your buddies to come work for you on your team full-time right away once you get funded. The highest cost burden for most startups is their employees.
When you hire full time employees, it’s not just their salaries that cost you cash. You also have to pay their benefits, provide them with office space and equipment, software subscriptions and coffee. There is additional overhead for each employee you bring on.
That’s not to mention the turnover costs and headaches of having to fire an employee. In many states, it’s increasingly difficult to fire full time employees.
A solution many startup entrepreneurs have taken advantage of is using freelancers and independent contractors.
You can outsource just about every function you have in your startup. Trust me, you do not need a full-time marketing VP right away. You can hire a small agency or a freelance marketing person to direct your activities.
Even in software development, this is true. You may have a CTO, or you me be the CTO, that’s responsible for developing your products. But maybe you don’t need a large team of software engineers working for you full-time.
You can hire contractors who can do a great job coding for you. If you decide to find them overseas, you may end up with the same quality of engineers for a fraction of the cost of hiring them from Silicon Valley.
2. Scalable Solutions
Star with the end in mind with everything, including what platforms you build and buy from vendors. Don’t build systems that can’t handle scale and that you’ll have to spend a ton of cash to rebuild or migrate to later on.
If you’re an eCommerce startup for example, include as part of your evaluation for a platform how scalable it is. If you’re deciding between Shopify Plus vs Enterprise Magento, find out how scalable each platform is at different milestones of your growth.
One might be plug and play until you get to $1 billion in sales. The other may require a team of developers to customize at the $500,000 mark. Build systems and platforms with growth in mind and you’ll save a ton of cash over the long run.
3. Cost of Headquarters
One of the biggest overheads for many startups is where they are located. Silicon Valley and New York City are much more expensive places to operate than Austin, TX and Raleigh, NC.
Companies move headquarters all the time. If your heart is set on having a swanky office in the middle of downtown San Francisco, you could always move your operations there once you are self-sustaining and not running on venture funding.
4. Accounts Receivables and Accounts Payable
These are financial terms you should learn, and learn well how to take advantage of. Accounts receivables (AR) is the money that is owed to you. Accounts payable (AP) is money that you owe your vendors.
If you can decrease your AR days, which is how long it’s taking on average for you to get the cash payment, and increase the AP days, which is how long you take to pay your vendors, you can instantly improve your cash situation.
For example, shorten your invoices from net 60 to net 30. In other words require that you get paid in 30 days instead of in 60. You can even look at giving discounts for early or upfront cash payments.
Also, negotiate with your vendors to pay them later. Ask them if you can pay them in 90 days versus 60 days. Many vendors, especially large vendors that are in good cash position themselves, would rather recognize the revenue they are getting from you than getting their hands on the actual cash.
Running out of cash is the quickest way for a startup to fail. Give yourself the best chance for success and the time you need to give it a good shot by being conservative with your cash management.