Cash Flow Management for Hypergrowth Startups: An Effective Guide
If your startup is clocking a CAGR of more than 40 percent, then congratulations – you’re officially in hypergrowth mode.
Though it’s great to see your startup on a “growth spurt,” it is a big reason you should focus on cash flow management. That’s because hypergrowth startups often accelerate their customer acquisition tactics, thereby impacting sales, customer success, support, and finance.
While spending heavily in the name of acquisition makes sense in theory, it’s important to remember that doing so can also take its toll on your burn rate, which should ideally be as low as possible if you’re going to hold a strong cash position. Some industry reports have found that as many as 38 percent of startups fail because their burn rates get out of hand.
So clearly, maintaining a healthy burn rate is vital for gaining traction and profitability. In this post, we will share the best practices to manage cash flow, boosting the success of your startup during hypergrowth.
1. Keep a Tab on Spending
Profitability is the prime focus for all businesses. But profitable brands can only be built by leaders who know the ins and outs of daily transactions, with CFOs controlling expenses vigilantly.
While initiatives such as paid marketing programs and building out your team by onboarding new talent are crucial, investing a large amount of capital without any reliable in-depth data analysis may result in financial losses.
Entrepreneurs need to identify the marketing activities paying the highest returns, while also balancing short-term wins with longer-term gains. Even investing $100 can bring you much more money in the future.
They should follow a similar approach while hiring resources or performing other activities. Armed with the right data insights, the funds should be smartly invested in income-generating activities (IGAs).
Count on scalable tools like Agicap and Spendesk for effective accounts payable management, thereby reducing the risk of a high burn rate. These tools track operational expenses in real-time and help startups make data-driven spending decisions, thus, reducing unimportant expenditures.
2. Choose and Track the Right KPIs
Key performance indicators help determine the effectiveness of campaigns and the progress of a business. They help entrepreneurs get a 360-degree view of operating cash flow, assets and liabilities, thus keeping them aware of impending issues.
Hence, selecting the right KPIs is essential to managing positive cash flow and strengthening decision-making. Here are some top cash flow KPIs to consider.
- Operating Cash Flow: This is the total cash a company generates through daily business activities.
- Working Capital: This is the amount of money that the company has on hand to continue running a business.
- Forecast Variance: The idea here is to calculate the total revenue generated or expenses involved in real-time in comparison to forecasted figures. So this KPI is crucial to determine what went wrong when formulating the most recent budget plans.
- Debtor Days: The number of days in which a business receives payment from its clients. The shorter the debtor days, the easier the cash flow.
- Creditor Days: The number of days that a business has before it’s required to pay its various suppliers.
- Return on Investment: The percentage rate of return that the business receives on its various investments. Positive cash flow management optimizes working capital, boosting ROI.
3. Build Your Discounted Cash Flow Model
Discounted cash flow (DCF) is a technique that helps estimate the cash flow that an investment can generate in the future. The term “discounted” refers to the capital that investors seek on an investment. So, building a discounted cash flow model can help hypergrowth startups estimate the value of their assets and make wise investment decisions.
But creating DCF models requires easy access to accurate information. It relies on metrics like the cost of equity, tax rates, and the weighted average cost of capital to forecast cash flows.
Calculating and reporting these metrics can be daunting. Businesses need to track internal processes and cash flow status consistently. Even minor mistakes can disturb the calculation, leading to negative cash flows. Using advanced FP&A software automates the process and offers error-free calculations for proper cash flow management.
4: Keep Track of Your Unit Economics
Costs and revenues are the building blocks of hypergrowth startups. Unit economics deals with the cost to revenue ratio per unit, and in tech, the customer is that unit. If the cost of spending per customer is high, the ratio will deteriorate, causing losses to be reported.
Especially in the software industry, customer lifetime value is relatively static, so putting all of your costs into the context of customer acquisition projections allows financial planners to ensure expenditures are commensurate. Thus, by understanding your profitability per customer, focusing on unit economics allows startup leaders to make smarter fiscal decisions for both short-term and long-term growth.
By tracking unit economics, hypergrowth startups can achieve the following goals:
- Gain more visibility into business processes
- Analyze customers’ behavior
- Determine the cost associated with acquiring new customers (CAC)
- Understand the profitability of the relationship with the customers (LTV)
- Develop effective strategies for product optimization
- Figure out financial performance and improve profitability
As hypergrowth startups grow speedily at a CAGR of 40 percent, they earn a lot of “new cash.” The constant reinvestment of this revenue can be a game-changer for market share and positioning. Reinvestment that takes unit economics under consideration can help you make significant transformations, whereas the wrong move can lead to negative cash flow.
5. Leverage Debt Financing
Leveraging debt is one of the best ways to fuel the financial gains of hypergrowth ventures. Debt signifies borrowing money for a fixed time at a pre-defined interest rate. Whether it’s to create a new revenue source for future endeavors or multiply the existing resources, hypergrowth startups need some extra capital to scale the business to the next level.
Depending on the business requirements, entrepreneurs can raise debt from investors. It can give you the push required to skyrocket ROI and reach new milestones. Unlike equity, debt financing allows businesses to have complete ownership over the funds. They can make investment decisions on their own.
The best part?
Businesses can keep repaying the debt installments from the generated positive ROI. Besides, debt funds help save tax, which is a huge advantage for businesses. So, taking the route of debt financing is a win-win.
6. Prioritize Spending on Talent Needs
When growth is so rapid, recruiting new employees and retaining current talent becomes a top concern. A shortage of skilled employees can stunt an organization’s growth and cash flow. Focusing on making quick but effective hiring decisions, then, helps a great deal to ensure sustainable business progress.
Here are a few tips to get started:
- Analyze operational expenses
- Close on a budget for the recruitment process
- Develop a strategy for recruiting and retaining employees
- Deploy assessment tools like SurveyMonkey or Vervoe to check the candidates’ skills
Besides, entrepreneurs should maintain transparency between the teams and work processes and set an example of strong leadership. It will boost the morale of their team, meeting corporate needs.
7. Update Your Growth Reviews and Financial Projections Regularly
Financial planning and timely review of an organization’s performance are pivotal for cash flow management.
Investors and other stakeholders often put significant pressure on hypergrowth startups to create new business opportunities rapidly. Sometimes, they may even give short deadlines to achieve these goals. Since the shift of hypergrowth startups towards being profitable ventures is hardly a given, teams may find it overwhelming.
The pressure may lead to failure in meeting the expectations of investors, impacting cash flow. So, to ensure the best performance, entrepreneurs need to plan their finances. They should work on mapping the journey to help investors review the progress at any given point
By analyzing the status of investments, venture capitalists can decide their next move. Proper planning and tracking of finances help spend the budget efficiently while encouraging investors to spend more money on the venture. This systematic practice nurtures the relationship between the company and investors, ensuring successful and long-term deals.
Every hypergrowth startup faces cash flow management challenges in the initial stages. The decisions during this sensitive period can make or break their game.
Implementing the above strategies can help reduce the chances of failure. They address real-time challenges and can help generate positive cash flow.