Too Many Founders Neglect Cash Projections For Their Startups—And Pay For It Later As A Result. Here’s How To Get It Right
Every founder wants to feel in complete control of their company.
And yet, many founders ignore arguably the most important variable in their entire venture: their cash situation. Which makes perfect sense, since most individuals who choose to set down the path of entrepreneurship are typically not “finance wizards” or former bankers. These are highly creative problem-solvers with big imaginations who have the passion, drive, and determination to bring their idea into the world.
Unfortunately, it really doesn’t matter how great of an idea you have if your company has run out of cash. Cash is the lifeblood of every business, and the moment your cash situation starts getting risky, you’re going to stop thinking about all the things your company “could be” and start planning for all the things your company might have unfortunately become. Which is why creating good financial habits from the beginning, and making sure you have a few checks and balances in place, is such a crucial part of the startup journey.
Every company should leverage financials to inform decisions and direct strategy.
Not all companies have the people and/or resources to invest the time into an expansive series of Excel workbooks. They also just might not have the mathematical chops to tackle financial reporting on their own—so they have to figure out how to get those numbers, either from a consultant or from software.
At my previous company, I would personally spend 30-40 hours a month forecasting—on top of the 100-plus collective hours our accounting team dedicated to keeping up with forecasting the future of our fast-growing company. We literally spent thousands of hours over a decade perfecting our models and forecasts and brought in seasoned CFOs to validate and audit our process.
Now, what many startups and companies will do is hire a consultant to help them look for ways to improve their financial visibility. However, if you go the consultant route, know that you will need to work very closely with that person to help them become deeply familiar with your business processes. Handing a financial consultant raw numbers isn’t enough. The numbers are only part of the whole picture and in order to produce accurate financial reports—especially cash projections, they will need to know where the numbers came from and what core aspects of the business they impact.
For example, I recently spoke to a founder who was looking for a better way to handle financials because working with a consultant wasn’t delivering results. After he explained the situation, the issue was fairly obvious. The consultant simply didn’t understand his business well enough, and could not extract meaningful conclusions from the company’s financials.
Whether working with a consultant or not, though, it’s important to understand two different types of forecasting.
Between the big two, transactional and trend forecasting, I highly recommend using the former.
Trend forecasting relies on what you’ve done in the past in order to make assumptions about what is going to happen in the future. This can potentially work if you are in a very stable business that has been around for many, many years—but for smaller, fast-growing companies, this luxury doesn’t exist. For example, when my first startup was growing 3000% there was no way I could have looked at historic trends to forecast the future. The business was changing too quickly and we just didn’t have that data.
What we do with PlaceCPM is forecast transactions themselves—what you will sell/buy in the future, and the impact that will have on your business.
This might seem like a small detail, but this visibility over your cash flow (down to the day) can greatly increase the accuracy of your financial forecasting—and can be incredibly helpful for small to mid-sized businesses trying to stay alive. The software then helps collect data to help make informed business decisions. And as you amass a larger data collection, your forecasts become more and more accurate.
This approach also provides more flexibility and provides a comprehensive list of every step of the transaction. Essentially, you then not only understand “what” but also “why.” And when something changes—a client doesn’t pay an invoice on time, for example—it’s easier to move things around and make changes with transactional forecasting.
Of course, there will always be an inherent degree of uncertainty with all forecasting.
And the further out you forecast, the more difficult and uncertain forecasting will be. But it’s always better to have a plan, even an imperfect one, than to “wing it” as you go along. You don’t want to be the founder who relies on their gut instinct to feel out whether their business is going to go under or not. And while using the right forecasting models and software can certainly help, these things alone will never be a silver bullet.
Ultimately, running a business well requires a deep understanding of both sides of the equation—both your business operations and your financials—so you can identify and plan for the links between the two.