As a startup founder, in the first stages of launching your company, you’re likely to be more focused on getting your idea off the ground, and growing the creative and commercial aspects of your business, than on the less exciting administrative and financial tasks involved in the day-to-day running of a business. After all, in order to succeed, a business should be customer-driven, right?
We would say, yes absolutely. But not only. Acquiring (and keeping) customers is key to any company’s success. Your clients provide you with precious insights, they help you to refine your vision and develop your product and should ultimately become your main source of revenue.
However, whilst developing your client base is a priority, taking the time to put in place the right tools to help you track and manage your cash flow should also be a priority. Because even if your client acquisition rate is the best ever, without solid financial foundations, your startup may not get far.
Victor Drault, startup founder and Principal at Breega knows that, as dull as it may sound, financial management is key. And he is here to tell us why your startup business should, in many ways, be as much cash-management driven as customer-driven….read on to find out why 🙂
You’re a former founder, tell us about the company you created.
I founded CarpeDièse, an online music school based on an innovative learning management system, with my two co founders. All passionate about music, we wanted to combine our love of music with our desire to found our own company. As musicians, we had all felt that our learning experience could have been better. So we created CarpeDièse, based on a new and efficient learning method that combined pre-recorded training videos and one to one webcam sessions with specially designated teachers.
How did you go about raising the necessary funds to found your company?
We started with our personal savings and then went on to raise €170,000, mainly through business angels.
However, as we didn’t get to the Series A stage, it was tricky to raise public money from institutions like Bpifrance and our limited resources forced us to develop a strong cash management policy.
So you made controlling your cash a top priority right from the start?
Absolutely! Our approach was primarily data-driven, consequently, monitoring our cash flow was a top priority. You can be the best driver in the world, with one of the most powerful cars, but if you don’t have any fuel in your car, you’re not going anywhere! Cash is fuel.
Monitoring your cash flow closely allows you to avoid problems and also gain the trust of current and potential investors. But above all, it allows you to spend more time on business opportunities such as developing your product, your positioning, your relationship with clients…
With this in mind, we not only closely monitored our cash flow, we also built a financial planner, a roadmap featuring our break-even point, objectives and perspectives, our estimated time of arrival, and how much cash we would need to reach each of the different stages in the given time.
Why is it important to have a financial roadmap if you’re just starting out?
Well, say you’re a successful SaaS start-up (they tend to grow fast), you’ll no doubt reach your break-even point quickly. However, in order to continue growing at a rapid pace, you’ll soon require external financing.
You therefore need to estimate, almost right from the start, at what point in the future you’ll require extra cash, and how much. You’ll have to continually monitor your income and adjust expenditure accordingly to make sure you have enough in reserve to get through your funding round and afterwards. This is true for all startups.
It’s worth keeping in mind that it usually takes around 6 months to obtain funding from investors. And during those six months, you still need to pay employees, rent, customer support… You need to make sure that your company is not running out of cash when you’re looking to raise.
Your startup’s financial health depends not only on your capacity to earn cash but also to manage it correctly. And investors expect this. In order to raise rounds you must be able to show very clearly your monthly recurring revenue (MRR) and most importantly how you plan to achieve a 10%-15% growth rate, month on month.
More generally, between funding rounds, you should keep an 18-month time limit in mind. This is usually the amount of time a raise will buy you to run your business before you need to start raising again.
So, are you saying that as a startup founder I should focus as much on controlling my cash flow as on developing my client base?
Yes, that’s right. Your clients allow you to shape, adapt and build your business. They are obviously an essential economic and financial lever and should ultimately become your number one source of revenue. However, if you don’t manage your finances and cash flow correctly in the early stages of building your business, you risk stunting your company’s growth because at some point you’ll lack the necessary funds to continue developing your product, grow your client-base and ultimately scale your company.
As a startup CEO was there anything that you would have done differently as regards your cash management?
After our fundraise, we were probably a little less rigorous in our cash management, for example, we took longer to make decisions on whether or not to keep certain acquisition channels that were pretty pricey. The thing to keep in mind here is that even after having raised money, you still need to act as someone who hasn’t raised any money. You need to maintain the same level of rigor as regards spending and stay focused on your cash management. All your spending decisions should still be made according to the opportunity that they represent.
Again, be data-driven, base your decisions on data, statistics, and forecasting. Even if you’ve raised a million euros, one euro is still one euro and that one euro could have been better spent somewhere else!
Are there any cash flow management tools that you would specifically recommend to any startups reading this?
I would say that the basic tool to have, the most essential one, is quite simply an Excel spreadsheet. Easy to create, easy to modify, it’s the best forecasting tool at the start of your start-up.
The basic elements I would recommend you include are cash in/out, taxes, working capital… It looks a bit like this:
Then, there are many tools that exist today that can help you manage your cash and save time.
Any great cash management tools that you can recommend?
Monitoring your working capital, accounts receivable and accounts payable, is key as these obviously have a huge impact on your financial health. As concerns your clients, tools such as Upflow are great to make sure you get paid on time. Using digital factoring companies (Finsy, FinexKap etc.) allows you to receive cash for your client invoices straight away and certain will also send out reminders and collect your invoices. Other companies, such as Libeo, one of our portfolio companies, have developed an online platform which helps you manage and pay your service provider invoice. All of these tools are great time savers.
Otherwise, tools such as Agicap are interesting for helping you with cashflow modelling/forecasting. Once your company has grown and developed several products, other forecasting tools such as Chartmogul, for example, might be necessary.
And what about banking solutions, do you have any tips that you could share on how to choose the right bank?
When you start a company and open a bank account you need to make sure your banker understands your activity, the challenges you will inevitably face and the general dynamic of your start-up.
Another decisive criterion were charges such as account fees, the price of short-term credit of line…You should try to negotiate in order to pay as few charges as possible. negotiating doesn’t cost you anything!
Last but not least, bear in mind that your company should always have two bank accounts. Having only one account can limit future opportunities and reduce your leverage. Whereas if you have two bank accounts, you have access to two overdraft facilities, two different loan offers, two payment options. Having two bank accounts also provides you with a safety net. If for some reason down the line you run into difficulty with one banking partner then you can still have the other one.
New banking solutions are currently emerging all the time: online banking, applications that monitor your bank accounts and classify your spendings and resources and do a lot more! They are definitely worth looking into as they can save you a lot of time and money.
What is the role of the company accountant in all of this, aside from producing your annual balance sheet?
Having an accountant is fundamental. Administrative tasks are very time consuming and an accountant can take care of all insurance, tax and annual account validation issues which allows you to spend your time on business related issues.
What other cash management advice can you give startup founders launching their businesses?
The most important advice would be to continually check, plan and adjust.
These are the keys to managing a business.
Check your bank balance and cash flow at least every week.
Plan all of your spending decisions but also base decisions such as whether or not to launch a marketing or recruitment campaign or attend a certain start-ups event, competition or conference in terms of their possible return on investment.
Adjust all future decisions accordingly.
My second piece of advice is to consider each spending decision carefully and really prioritise what you spend your money on.
Thirdly, wherever possible, try to save money. Remember that time is also money so look at externalizing certain tasks if they are particularly time-consuming. Sometimes you can even externalize for free. Also, when you’re starting off, see if you can get into an incubator, this means you’ll not only save on rent but also benefit from all of the help and useful skilled contacts they can provide you with!