𝗘𝘅𝗽𝗲𝗻𝘀𝗲𝘀 𝗼𝗻 𝗮 𝗧𝗶𝗴𝗵𝘁𝗿𝗼𝗽𝗲
Updated: Oct 1, 2021
Whether you’re trying to make the next payroll or IPO in three years, cashflow is life. Balance growth and spend to reach your goal.
“𝐸𝑛𝑡𝑟𝑒𝑝𝑟𝑒𝑛𝑒𝑢𝑟𝑠 𝑏𝑒𝑙𝑖𝑒𝑣𝑒 𝑡ℎ𝑎𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑖𝑠 𝑤ℎ𝑎𝑡 𝑚𝑎𝑡𝑡𝑒𝑟𝑠 𝑚𝑜𝑠𝑡. 𝐵𝑢𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑖𝑠 𝑠𝑒𝑐𝑜𝑛𝑑𝑎𝑟𝑦. 𝐶𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑚𝑎𝑡𝑡𝑒𝑟𝑠 𝑚𝑜𝑠𝑡.” – 𝑃𝑒𝑡𝑒𝑟 𝐷𝑟𝑢𝑐𝑘𝑒𝑟
There are some major tradeoffs in how you spend money:
𝘖𝘱𝘵𝘪𝘰𝘯𝘢𝘭𝘪𝘵𝘺. Extending cashflow gives you more choices e.g. delaying fundraising resulting in retaining more equity, however...
𝘛𝘪𝘮𝘦 𝘷𝘴. 𝘦𝘲𝘶𝘪𝘵𝘺. A faster exit requires higher spend, and adding investors will reduce your equity.
𝘎𝘳𝘰𝘸𝘵𝘩 𝘷𝘴. 𝘱𝘳𝘰𝘧𝘪𝘵𝘢𝘣𝘪𝘭𝘪𝘵𝘺. As a startup with limited energy, it's impossible to focus on both. You need to choose one.
To help with expense management:
· Inform the team of your objectives around revenues and margins. When you give context, the team can help support your objectives.
· Pay for value if it will help you achieve your objectives faster, more efficiently, or save costs over the long-term.
· Review and replace products and software if quality, workflow, or customer experience will be the same or better.
· Spend money when needed e.g. to mitigate risk on compliance, security, and insurance.*
Ways to frame expense management:
· Establish strong methods to capture information so you can best understand cashflow.
· Control timing by waiting as long as possible to pay bills and ensure tight payment terms with collections.
· Install measures to ensure safeguards, such as more than one person reviewing payment, expenses, client contracts, and payroll.
· Lower costs on your larger expenses.
- Check if you can get a discount in exchange for free marketing
- Ask investors since they may have leverage across portfolios.
- See if banks, law firms, and other professionals are willing to offer a discount for the chance to work with you as you grow.
· Avoid fixed costs since you have less control, e.g. instead of hiring, check if some roles may be part-time, temporary, or outsourced.
· Model if your growth goes faster or slower than expected and plan to use scalable resources** as needed to manage transitions.
To minimize costs, put controls and measurements in place:
· Clarify expectations around purchases and benefits. I like to start with a “use your best judgement” attitude and define specifics later.
· Review transactions for any outlier or unusual activity. For instance, compare cost categories by months and dig into any high changes.
· Evaluate costs in the context of whether they improve performance and customer engagement.
Running a business is simultaneously thrilling and scary, like crossing a tightrope. Cashflow is the security you need to safely cross.
* The post on Insurance is here: https://www.webuildscalegrow.com/post/f4833875
** This post covers Scalable Resources: www.webuildscalegrow.com/post/d8297908