The Cash Tightrope
Managing Your Cash Burn
Being a founder is scary. One of the most anxiety-provoking elements of the founder role is managing cash. Whether you manage a company dependent on investment or one that’s profitable, thoughts about bank account balances, accounts receivables and expenses can send a chill reverberating down the boldest founder’s spine.
While I suppose some anxiety is good, as it motivates folks, most founders are eagerly dreaming of the day when they don’t need to worry about the company’s cash levels. If they get big enough, these issues go away – right? Unfortunately they don’t. The only things that really changes over time are the table stakes and the extent with which a founder becomes accustomed to dependencies on cash flows that he or she can’t always control.
I liken the balancing act that is financing a company to walking a tight rope. When you first start out, managing the cash in the business is like walking a tight rope across the first story of a building. When you’re monthly burn is $10K, if you slip, the fall won’t kill the company. Since in absolute dollars $10K is a relatively small amount of money for a company, there are lots of ways to cover a cash shortfall – including the founders financing it themselves.
When you’re monthly burn is $10K, if you slip, the fall won’t kill the company.
As the business grows, however, the tightrope doesn’t go away. You still need to juggle taking in sufficient revenue (or investment) to cover expenses. The only difference is that as the company scales the tightrope might be hinged between two 5th story balconies. When you’re spending $250K per month in expenses there are fewer ways to pad your fall if you lose your footing. Slipping could kill you.
When you’re spending $250K per month in expenses there are fewer ways to pad your fall if you lose your footing. Slipping could kill you.
In sum, anxiety about cash doesn’t go away – and it shouldn’t. Every founder should be at least nervous enough about their cash balance to be actively thinking about it. If you’re not a finance wiz or your busy running your operations, you better have someone watching your finances for you.
Nomad Financial (a member of the Interplay family) was founded by the former Head of Finance of Vimeo to solve this problem. The firm provides financial oversight from bookkeeping, to CFOs, to KPI development for startups.
However you choose to operate, just make sure that someone capable is monitoring your finances because if you get it wrong it could kill your company.
This was reposted with permission from Mark Peter Davis