Startup cash & treasury management with financial planning

A good cash management is a golden rule for any successful startup. Getting out of treasury is the worst thing that can append to any startup.

Remember this : “Cash is more important than your mother” !

Cash is the universal raw material to get almost anything. Running out of cash means that a startup can’t afford anymore to get what it’s necessary to run and grow the business. Without cash, most startup will crash sooner of later.

Hence, managing your startup treasury is really important to avoid getting out of cash.

It sounds pretty obvious. But it’s not so easy to run a good treasury management. Indeed, there are many reasons that can lead to a cash shortage. However most of these reasons can be avoided by building and updating a steady financial plan to forecast future cash flows. A financial plan will help any entrepreneur to understand the evolution of cash needs over time.

Let’s get deeper into main reasons that can lead to a startup cash shortage, to better understand how a financial plan can help entrepreneurs to manage cash and treasury.

A fuzzy roadmap with a strategy lacking of clear key steps of maturity to reach

One of the most common issue leading to cash shortage for startup, is the lack of a clear roadmap. A startup is not a smaller version of a large company. It’s usually a new business aiming to build a new business model or a new product/offer. This means that a startup is a venture aiming to manage uncertainty and risk to validate a business model and grow.

Cash is of course necessary for any startup to progress through this innovation process. However cash is a scarce ressource for startup because most financiers don’t really like “risk” (and an innovation process managed by a startup is risky !). So, startups have to manage the risk by spliting up their roadmap with clear key milestones : each milestone reached should reduce significantly the risk. With this approach, startups will be much more able to get new money from financiers after validating key milestones.

Hence, forecasting a clear roadmap with a clear financial plan is a necessary way of managing uncertainty … and cash !

Working capital requirement

Some businesses, usually “traditional businesses”, can face a need of “working capital requirement”. This is the need of funding to assume cash needs generated by stocks and also by the time shift between paying suppliers and getting paid by customers. For startups, this “working capital requirement” can be very low at the beginning, but it may sooner or later grow really fast simultaneously with a rapid growth. This is a common issue for startup reaching the beginning of a business traction. Such a strong increase of “working capital requirement” will usually result in cash difficulties.

Thus, this is really important for entrepreneurs running startups to build a financial plan to forecast their “working capital requirement” needs over time, especially in case of strong growth foreseen. It would be really foolish to run out of cash because of a strong business growth ! So, build a solid cash management with a financial planning.

Undervalued costs and investments

It’s quite common for entrepreneurs to undervalue costs and investments needed over time to reach key milestones. It’s obviously quite difficult to well estimate future costs and investments at the beginning. However, an undervalued forecast can have a critical impact for a startup. If a startup has to face more costs and investments than expected, it might rapidly results in cash difficulties.

We can highly recommend you to build a financial plan with overvalued costs and investments. Hence, it’s much easier to manage treasury with lower costs or investments than expected in a forecast! It will give you a comfortable flexibility of cash (instead of difficulties) ! So build a steady and large financing plan based on a overvalued costs and investments plan. Of course, remember not to be too excessive in your overvalued plan, because you need to convince financiers to invest in your startup. A rough 20% overvalued costs and investments plan should be a good compromise for most startups.

Revenues unpredictable

At the opposite, most entrepreneurs are usually really optimistics when they build revenue and growth forecasts. It’s of course a good way to estimate the “business potential” of a startup. But when it comes to cash and treasury management, an overvalued revenue forecast can very dangerous. Indeed, most startups usually face grealty lower revenues than expected in financial forecasts. It ends up with rapid cash difficulties because funding plans were based on more important revenues streams.

That’s why, we can also highly recommend you to build two versions of your “financial forecast” : A “normal scenario” and a “crash test” scenario. The “normal scenario” should be considered for you as a roadmap and goals to achieve, as well as for communication to financiers and other third parties. The “crash test” should be considered for you to test your cash management in case of worst case revenue scenario. Thus, when you are done building what you consider to be your “normal scenario”, build then an alternative scenario with very low revenue streams to test your cash treasury. Remember that you should always have a positive treasury until you reach the next key milestone of your strategic plan. So, if this “crash test” emphasize a treasury problem, you should remork your financial forecast to reinforce your cash management : lower costs/investments if possible, increase funding plan, …

Managing unexpected events

Beyond costs and revenues management, you should also remember that managing future uncertainty implies to have the capacity to face unexpected events. That means you should really consider to have a cash margin to face these unexpected events (it will always cost you! Remember “Monopoly” ;). Hence, add to your financial planning a margin for these unforecasted events. A rough 10% increase of your funding plan should be enough (if you have already overvalued costs and undervalued revenues).

Timing to get new fundings

Last but not least! Raising funds can be quite long. A lot of startups face difficulties in their treasury management due to optimistic timings to raise funds in their financial planning. Thus, you should really be careful when building a funding plan. First, it’s really important to inquire about fundings. There are many different kind of fundings : capital/equity, debt, benefits, … They all imply different conditions and timings. So, remember to build your funding plan taking into account these specific timings. You should also be cautious by forecasting a lateness in obtaining new funding (from 3 to 6 months of extra cash).

Build your cash management by building a financial planning with Business Model Forecast

Our free and easy financial tool, Business Model Forecast, should really help you building a steady cash management for your startup. You can download it for free here : Try it out! :)

He hope this article will help you building a great startup !

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