Cash flow crunch

I was going to write a blog entry earlier this week about the importance of having cash on hand, regardless if you are an individual or a start-up, due to the current economic crisis. Then out of the blue I run across this post and powerpoint about Sequoia Capital telling their portfolio companies to batten down the hatches and extend the runway as far as possible. This is a great lead into what I originally wanted to write about…

One can argue that an experienced financial manager is becoming increasing important to have at a start-up. In some ways it may even provide a strong competitive advantage by knowing when to conserve cash, open the coffers for strategic opportunities and go for funding. Running a business is no easy task, and having to deal with the cash flow makes it even more difficult in today’s economy.

So how does one ensure the doors are open, money to fund growth is available and still keep morale up?

Here are is what I would as CEO of a start-up company that was barely cash flow positive or losing money and have 3-6 months cash on hand.

  1. Re-evaluate business priorities and revenue outlook. Assume worst case in the pipeline and prioritize products, segments, markets you are going after. You get nothing for free and at times like this, staying focussed and saying no to distractions will be the difference between surviving and having your company name sitting on an Internet tombstone someplace.
  2. Cut staff and expenses to get an additional 3-6 months runway. The standard way to do this is have each dept. rank employees and then have the exec team review company priorities against headcount and start listing people that do or don’t make the cut. Make the cuts quick and ensure you only have to do it once. The worst scenario is to drag out the inevitable resulting in unnecessary rumors and multiple cuts which would destroy morale.
  3. Win back the confidence of your employees by reinforcing that the changes you made are to grow the company in these difficult times and that they will be rewarded. The worst ting that can happen is making cuts to keep the most valuable people and then have them leave for another job. Make sure that you make it financially rewarding for people to stick out the bad times. There are too many outside forces going into everyone’s decision making that you cannot risk losing valuable members of your team. Promising upside on sales growth, positive cash flow or specific company metrics is a good place to start. Cutting back on high risk sales/product projects that are distractions from the company’s core focus help reinforce to the staff that the exec team understands the need to batten down the hatches. Deliver a story to the employees that gets them all moving 100% in the same direction.

Is there a full proof way to stay afloat over the next 12-18 months? Of course not. But making that journey with a group of people who all trust in one another and trust in the management team’s ability makes that journey all the more enjoyable.

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