Cashflow Management in Cash-Strapped Startups

Photo: Unsplash

Cash is King, or so they say. And they are right.

Having run a cash-strapped startup in Shanghai for nearly 10 years, I have considerable experience with managing cash, customers, vendors, employees, and the continuous fun that is cash-flow.

I hope to share a few things lessons, as I’ve been late on payroll, vendors, and certainly myself so many times I’ve long lost count. Even in dire situations, there is an art to doing this to avoid internal mutinies, vendor revolt, and crippling stress.

As we well know, most startups never have enough cash, at least until very serious funding rounds, and even then their wants and desires often outstrip available cash, especially as they get near the end of their runway (especially in high-cost areas like Silicon Valley.)

Generally, startups fall into a few situations, the two most important being those that have revenue and those that do not, and those that have unused capital and those that do not. Today I’m talking abut startups with revenue and unused capital in the bank, which is my experience and most common.

Goal is Survival, above all else

The first rule of Cash Flow is to remember your goal: Survival at all costs. Even if vendors are screaming and employees leaving, as a dead company pays no one. Your job is to ease the pain, take care of the most urgent needs, be sensitive to everyone involved, and communicate all the time, as people will give you amazing leeway if you are open, honest, and they trust you are working hard to fulfill your commitments.

Capital

The second rule of Cash Flow is that you will spend whatever you have. This is human psychology and it takes a very strong person to not spend cash-on-hand when employees and vendors are asking. So a lot of this process is protecting you from yourself, i.e. making it easy to make key payments but hard to make general payments. Money fixes lots of things, especially in a crisis, but only if used wisely.

You’ll spend whatever you have

This means absolutely segregating your capital, i.e. money from investors, into a separate account, even a separate bank. Make it hard and visible to use this money, as this is like blood and when it’s going, you are likely dead.

Then your job is to be miserly with this money, i.e. you feed it into the main company accounts in small bits and as slowly as possible — I used to do this $5–10,000 at a time, though sometimes had to bit a much bigger $50K chunk in particularly painful periods (these are a lot when my total capital in the bank was $100–200K).

Be miserly with capital

Some people feel this is just delaying payments, i.e. what difference does it make if I use capital now or later, as the results are the same. This is not true, for several reasons. First, if you have it, you’ll spend it, which increases your spend or cost above what you’d do if you didn’t have it in front of you.

Second, deferring payments and retaining costs give your flexibility to deal with emergencies, unexpected opportunities, or having to cut costs — but once it’s spent, it’s spent and the longer you can hold on to it, the better.

Revenue

The third rule of Cash Flow is not all revenue is created equal, especially in how it can be used. I’m a fan of recurring revenue, as are investors, so try to work as hard as you can to get that. Project or one-time revenue is nice but really hurts cash management over time.

Ideally, you have many customers paying your monthly or quarterly in staggered times (not all Jan 1st) — this is key as it brings in a little cash every week and month, which then you use to spread the love around continually — the next partial payment is never far away. Lump payments are good, but spread out is better as it just helps deal with the psychology of spending what you have, and creating bigger troubles later.

Vendors

The forth rule of Cash Flow is vendors can wait. Of course, it’s not that simple and not all vendors are of the same importance nor forgiving. For example a lot of people delay or partial pay their rent, but our landlord had a huge penalty on the lease for this, so we always paid it first — you will have similar vendors that must be paid no matter what — keep your eye on your cash to pay them at ALL times, and make sure you have enough or o plan to get it. These few vendors come before payroll and are often the reason you have to transfer some capital.

Vendors can wait

Beyond the critical vendors, you have to manage the rest. I’ve seen people just not pay anything and not communicate, but this is a big mistake. You must tell your vendors you are short on cash and working on payment, and more importantly you really must make partial payments — these have a huge psychological impact on the vendor as they demonstrate you care and are working hard on it; just doing nothing or saying we’ll pay in a few months does not make friends. Paying even $1K/month does.

Also, paying a few smaller payments over time is better than a big one, though situations vary. For example, I’d rather pay $1K/weekly than $4K monthly or $8K every two months. Why ? It feels better for them (and is easier for you), as you really are only as good as your last payment and even a trickle of money from you feels like continual positive interaction.

This constant small payment is your most useful tool when cash is short. Of course, if you get a good customer payment in, raise that week’s payment a little, like $2.5K or whatever; it shows good will, which is all you have sometimes.

Vendor management is an art

At the same time, you have friendly vendors or large ones who don’t pay too close attention, so you can stretch out payments a long time, though you always have to worry they’ll wake up one day and demand their $100K, but at least you are still alive. We’ve been a couple hundred thousand in debt over a year to vendors this way, though eventually, we had to make progress payments, but not making those early payments really helped a lot.

Payroll

Next rule of Cash Flow is handling payroll. Many years ago I was scared that if we missed or delayed on payroll all the employees would leave or be looking for the exits. I learned this is not true; however, it greatly depends on your leadership to date, including and especially the CEO trust factor and employees buying into the future. Invest in this now so it saves your butt later.

But there are many ways to ‘miss’ payroll. First, it’s not a miss, but a delay, so the terminology is important. Second, you almost always have some cash, just not enough for paying everyone in full, so the question is do you pay any, and if so, how much and to who? We’ve tried different strategies and my theory is two-fold: the lowly paid people really need to be paid as they often live on the edge (and are easier to pay), and that it’s better to pay everyone something than some people full but others little or nothing (we’ve tried this, too).

Take care of the team

In practice, this means setting a payment target, say $5000 per person and putting that against your net payroll per person for payday, and add it up (so anyone paid under $5k/month gets paid in full, those paid over $5K/month get $5K). Compare to your available cash. If too high, try $4500; too low, try $5500, etc.

But don’t use all your cash as an important part of this is handling hard-luck cases, as when you announce this, you must tell people to come see you if they desperately need money; a few will come, for various bills, mortgages, etc. and you really have to try to pay them what they need. This is an important part of compassionate leadership in a difficult situation.

Then as more cash comes in from revenue, etc. you pay out more blocks, keeping the team updated if these take more than a week. Of course, if you have no new money coming for weeks (as happened to me once) or months, this is a much bigger conversation, and other things get involved like rent and key operational fees.

Painful to borrow from the IRS

Note you also need to keep cash to pay benefits of various types, including and especially taxes and 401K deposits. It is indeed possible to ‘borrow’ from the IRS on tax payments, but this will come to bite you later and is really only for emergencies (though I’ve seen it done and the costs are not that high, though there is now a personal liability for this, so be careful). As far as I know, it’s illegal to ‘borrow’ or delay 401K and similar payments.

Note all this is much easier if you manage your own payroll, rather than use a payroll service or pay through something like Xero. This is why we ran our own payroll for many years, and this type of flexibility is the #1 thing to look for when choosing a service; really.

That’s it. To sum up, separate your capital and trickle it in miserly. When things are short, start with vendors and do continual partial payments plus communications. For payroll, it’s similar but be fair and open and also pay continual partial payments. This all keeps you alive to earn and pay another day.

P.S.

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Steve Mushero

Steve Mushero

CEO of ChinaNetCloud & Siglos.io — Global Entrepreneur in Shanghai & Silicon Valley