As a classically trained financier and someone that became a spreadsheet jockey managing forecasts, budgets, and pricing for a large company, I thought managing cash flow for my first startup was intuitive. One wrong assumption later, I was f**cked and used credit cards with 17.99% APR to manage working capital. Do NOT do this.
Managing cash flow should be your priority as a startup. If you’ve made it as far as creating a business plan, chances are you’ve had to give more than just passing thought to how you’re going to handle managing money throughout your startup. It’s all too easy to fall into the habit of forgetting about cash flow, especially when you just closed the last round of funding and have a phat bank account. You want to hire more developers, build a new sales and marketing machine (more on this in future posts), or buy a jet. The money will come, right?
Unfortunately, that’s rarely the case. Improper cash flow management could spell death for your energy startup, and I am tired of bailing you out as your investor.
Raising Capital, Creating Changes
When companies raise capital to scale, there are changes that must take place within the business to make this possible. It’s not simply a matter of increasing the funds you have on hand in that moment (such an easy assumption that is truly insane); you must also make a number of changes within your energy business that will make it possible for you to achieve your goals.
Bring in the Experts
You’re already an expert in your industry, but that doesn’t mean that you’re an expert in every area. As a founder, chances are that you’ve taken on any number of roles within your business. As your energy business grows, however, you may discover that it’s more effective to bring in experts who can take on many of the tasks that you once completed yourself. You might discover that you need a real CFO, that you need a true architect and CTO for your product development team, or that it’s past time you hired someone to take over sales for you (again, there is more to say on this, wait for my future post on this). If you want to grow your business, you need those experts to help make it happen.
As a side note, many entrepreneurs get hung up on the cost of hiring experts to take on those positions. Hiring experts can take any number of forms. You can bring in contractors to take on short-term roles or outsource some of those tasks if you aren’t ready to dive in and hire someone to take care of them right now. I am a huge fan of the try and buy for incoming executives. As you’re evaluating cost, keep in mind that your time is valuable, too — and freeing yourself from those routine tasks can pave the way for greater innovation and structure within your business. The winners do this!
Build Up Your Management
When you create growth within your energy business, you may assume that you’re doing the same thing you’ve always done, only bigger. The reality, however, is that you need a management team and new management processes. Those management structures are designed to accommodate the increased employees throughout your business. Not only do you need people to manage those new additions, but you also need a clear chain of authority and easily understood processes that make it easier for employees to know who they need to turn to with problems or concerns. (QUIZ: without looking at the company manual that you had to produce for investors like me and/or to get benefits, can you tell me how real cash is approved and allocated?)
This is the time when my friend John Gibson will ask, “Who is responsible for sales (product development, etc…).” If you answer, “We all are responsible,” the next question will be: “Who do I fire when you miss the sales number?” While scary, there is an important maturation that needs to happen.
There are two important questions that I ask my CEO’s as they reach scale: (1) how many executive team members have been in the same position at a company at least 2x – 3x the size of this one? and (2) does your team understand that there are step-function increases in costs in your industry at different revenue milestones and how are you planning to manage it? (I will write more on this topic but in short, cost increases come at step-function changes in scale and most CFO’s lack this understanding).
As you put together your management team, keep in mind your overall organizational structure and your working environment. Adding team members is great, but you also want to maintain ties across your organization, build relationships, and maintain the company culture that your employees count on. Many of your employees have stuck with you since the earliest days of your energy startup, and they’ve shown a high degree of commitment in the process. Show the same degree of commitment to them (unless they do not belong… that’s a future post) by maintaining the company culture, from the values you’ve always stood behind to the great working environment your employees have come to count on. Those employees are the foundation of your company, and you want to ensure that they stay with you as you grow and develop. This is a great topic to debate. Shall we?
Develop Planning and Forecasting Skills
Planning and forecasting do not happen automatically. As you grow your business, you can’t simply assume that your current growth will continue at the exact same rate regardless of anything else that happens. As an entrepreneur, planning and forecasting skills are among the most critical tools in your arsenal. Fail to develop them, and you may find that you can’t effectively grow your business. Trust me, I see this all the time. Planning and forecasting can also help you weather serious concerns like recessions or slow periods for your energy business, since you’ll already have the tools in place to move through them. I started out my career in this role and loved it. I have a special frustration over companies that lack this skill and lack the urgency to develop it.
Redefine Processes That Aren’t Working
As your energy business grows, you’ll discover that you have different needs than you did when you were a smaller company. This will be a step-function change in your cost structure, not linear. You may need to change the way your development team is organized. You may need new communication processes, or find that your back-office processes are too manual and you need a real ERP system (do you have someone that has been through this before?). Redefining and redirecting these processes is critical to ensure that your business continues to grow (instead of collapsing under the strain).
Why Is Managing Cash Flow So Important?
Growth requires cash — plain and simple. Even profitable businesses need cash ahead of growth. In fact, if you don’t have the cash you need ahead of any growth processes, you may find that growth eats up cash faster than you can generate it. This is another one of those head-scratchers on how even the more seasoned entrepreneurs lack financial acumen.
Enter cash flow management.
In order to effectively grow your energy business, you don’t just need to have cash coming in. You need to know how to manage it so that you have the capital on hand to continue to grow and improve your business.
Consider this: during periods of growth, you’re hiring developers and paying a team to develop a product BEFORE you are delivering and getting paid for it. Unfortunately, all too many businesses fail to prioritize cash flow management properly — and that can create a host of problems they must then address. And calling me is not the answer. I still send out my weekly “peace of mind” cash flow model (thank you Inc. Magazine) for startups because it saved my first business. Yes, weekly cash flow model.
What Happens to Startups that Fail to Prioritize Cash Flow?
In short, startups that don’t prioritize cash flow fail.
Now, hear me out: many people think that prioritizing profit is the way to go. Investors like profit. When you have profit, investors win, and they are therefore more likely to invest in your business.
Profit, however, is just one step of the cash flow equation.
If your business is hemorrhaging money — even if you ultimately have profits — you’re missing out on opportunities to expand. Eventually, those profits may dry up. If you fail to understand cash flow properly, you may struggle to survive lean seasons or find yourself desperately seeking more investors. But cutting expenses could actually prove just as effective.
A poor understanding of cash flow may also mean that when investors put more money into your business, it causes problems instead of alleviating them. If you don’t properly manage that incoming cash — which includes having a solid understanding of what investments will generate more profit for your company over time and which ones are not sustainable without continued funds — that investment could be the beginning of the end for your energy startup.
Making Cash Flow Your Energy Business’s Priority
Ready to change your perspective and make cash flow your energy business’s priority? Make sure you’re incorporating these important strategies:
1. Design an agile structure within your company from the beginning (or create an agile structure as you grow).
An agile structure — one that can quickly and easily be adapted as your energy business grows — can make all the difference when you’re ready to implement that growth. Don’t be afraid to dream big in the early days of your startup! Create systems that will easily scale and adapt. Offer clear explanations for the company’s processes and values. With this simple step, you can smooth out the growth process. And when your board gives you insight on how to improve, take it.
2. Don’t bite off more than you can chew.
As an entrepreneur, one of the biggest challenges you will face is looking at an opportunity that is too good to be true and let it pass you by.
You know you’ve got what it takes. You’re ready to embark on this latest phase. The problem is, your business just isn’t big enough yet, and you don’t have the infrastructure in place to handle it. Time to put these questions in front of your board.
In the energy industry, people remember failures — and they have very long memories. You’re better off allowing an opportunity to pass you by than you are crashing and failing because you tried to accomplish too much in too short a time. Be willing to be patient! Other opportunities will come along when your business is better suited to handle them.
3. Create a process for spending.
As an entrepreneur, you must be able to prioritize your business’s needs over your desires — including your desires for growth and profitability. This includes:
- Prioritizing financial need. The CEO must think in cash and be able to tell rattle off critical metrics to investors and board members (burn rate, cash-out date, cash conversion cycle, customer acquisition costs, etc.).
- Remaining accountable to yourself (and to your board) for your spending
- Knowing where your cash is coming from every time you spend
4. Make saving a priority.
Sure, investors often fund businesses to help them grow. But that doesn’t necessarily mean that you will get exactly the investors you want at exactly the time you need. Make savings a priority for your business, both to create a pool to draw from during lean times and to ensure that you’re able to grow without relying entirely on investors. We all know that raising money takes longer than expected (Shh… and sometimes, investors will stretch it out to see how you handle and/or gain leverage).
How to Avoid Dooming Your Energy Startup
Failure to properly manage cash flow will quickly spell doom for your energy startup. According to CB Insights, you should also keep in mind a number of other potential challenges that could cause issues for your startup — or doom you to failure. These include:
- You don’t have the right team in place to handle the business as a whole.
- You don’t have a solid business model in place.
- Your marketing fails to reach your ideal buyer — and leaves you struggling to find investors, too.
- You haven’t created a unique, effective product that solves a need in your industry. If people don’t need it, they aren’t going to buy it!
Many entrepreneurs are highly passionate about their projects and their efforts, especially in the energy industry. Failure to properly manage your startup, however, could cause you to lose your business before you even have a chance to get it off the ground. Pay attention to your cash flow: to accounts receivable, to invoices, to the products and inventory you already have on hand. Then, make sure you know how cash moves through your business and what you’re spending it on. It may surprise you just how effective these simple measures can keep your business afloat.