Jeff Nock, a leadership and business development consultant, offers five tips.
Jeff Nock is an internationally recognized executive and consultant with expertise in developing startups, small and mid-cap companies, and nonprofit organizations. His expertise has helped many companies create cash flow management plans and initiatives. As someone who has accumulated experience developing and implementing cash flow management plans for various types of companies, Jeff Nock offers an essential set of practical tips for companies that are just starting out.
Jeff Nock states that “When new businesses are launching, it’s an exciting time, and everyone involved is geared to succeed and make their mark on the world, but during these ramp-up months and first few years, it’s important not only to focus on revenue growth but also cash flow management. Not always an easy task, it’s essential to have a plan and to stick to that plan.” Key components of a cash flow management plan and a revenue growth plan involve calculating the burn rate, runway, cash flow positive, and profitability point for the business, tracking and evaluating cash inflows and outflows, bringing the financial experts on board, hiring the right staff with the right skills, and leveraging technology.
Jeff Nock‘s First Tip for Cash Flow Management: Calculate the Burn Rate, Runway, Cash Flow Positive, and Profitability Points
As leaders and founders of startups can be focused on the overall vision of the company and initial revenue generation, it is important to not forget about key financial projections and then track actual versus projection. In addition to having a close eye on revenue, it is important to monitor the monthly burn rate. As startups spend or “burn” more money than they bring in, the monthly burn rate is revenue minus expense. So, if revenue is $1,000 for a month and expenses are $10,000 then the monthly burn rate is $9,000.
A startups runway is the amount of time they have under current projections before they run out of money. If a company has $1,000,000 in cash and a monthly burn rate of $100,000 then its runway is 10 months.
Many startups confuse cash flow positive with profitability. Cash flow positive is when a company is no longer burning cash on a monthly basis, but rather breaking even or generating a monthly profit. Companies don’t become profitable until they have generated enough positive cash flow to pay off any initial debt (from owners or investors).
Calculating these important financial projections is important as companies look at long term investment and are financial projections that potential investors use to determine whether a business is viable and worthy of investment. Once these projections are in place, startup business owners should track the progress towards the projections and make strategic business decisions to grow revenue and manage expenses accordingly. If revenue is slightly ahead of projections and expenses are on forecast then the business owner can decide to either save that excess cash or reinvest to spur faster revenue growth.
For investors (whether the owner, friends and family, angel or VC), these financials, combined with the strength of the business model and leadership team enable data from which to evaluate business viability. If a startup has a $100,000 in startup capital, a burn rate of $10,000 a month, and has a plan to triple revenue with an influx of an additional $100,000 in funding, the investor can make an educated decision on whether to invest. If the startup has $100,000 and a monthly burn rate of $50,000 it may be too late for that company without a drastic reduction in expenses or a sizable new source of revenue that is imminent.
Jeff Nock‘s Second Tip: Review and Evaluate Cash Flows
Reviewing and evaluating cash flows starts with tracking expenses and revenues. While this seems basic, there are sophisticated cloud platforms and software applications that can help automate whether revenue and cost management techniques are being leveraged. While most startups are focused on living day to day and month to month, it is still important for mentors and investors/potential investors to see logically created financial projections. Software like PlanGuru can provide analytical budgeting tools, which can help startups make more accurate financial projections for up to ten years. Many of these applications also offer training packages to help business owners learn the capabilities of the applications and available forecasting tools.
Having forecasting tools can help startups that do not have an established history get a better handle on ways to optimize expenses and revenues. A lack of an established history of cost/revenue trends is one of the reasons why it is critical to frequently review cost and revenue data once it starts coming in. Adjustments to production, price points, and fixed and/or variable costs may need to be made quickly. As a best practice, Jeff Nock recommends startups begin by reviewing costs and revenues weekly and then back off to a monthly basis.
Jeff Nock‘s Third Tip: Call in the Experts
Startup founders have quite a bit on their plates and different hats to wear when getting a new business off the ground. It can be overwhelming to have to handle strategic management, human resources, and hiring/retention, technical infrastructures, and financial management. Even if the founders and leaders of a new business have training or experience in financial management, it is best to utilize mentors and when possible bring external consultants and experts on board.
Bringing in external financial experience is crucial as a startup business owner is too close to their business to have an objective perspective. As Nock advises, “many early-stage startups outsource the finance role to certified public accountants who can come in a few hours a week and handle accounting and cash flow management.” Outsourcing the financials and cash flow management provides startup leaders with more time to focus on growing the business.
Selection criteria for a certified public accountant or financial consultant should consist of criteria like experience, recommendations, availability, services, and goal alignment as well as affordability. Examine what type of experience an accountant or consultant has with other successful startups and determine whether that person’s experience is similar to the startup’s industry, product or service line, and organizational form or type. Ask whether the person’s work ethic and philosophy match the organization’s culture. Review testimonials from current and former clients and ask for references.
Jeff Nock‘s Fourth Tip: Hire Financial Help at the Right Time
While most early-stage startups can’t afford to hire a full-time accountant right away and use external accountants for a few hours a week, eventually, as the company grows, the amount of accounting will also grow. As outside accountants will usually charge more per hour than in house accounts cost (not including benefit), it is important to realize when the outside consulting work has reached the point where it can be replaced by hiring an accountant. This can be done part-time at first and eventually ramped up to full-time.
When considering this initial hire, make sure to invest in not only the individual’s expertise but their fit with the company’s culture. Often, whether it is a financial person or any other role, people, in general, do not understand the need for adaptability when working with startups. This isn’t to say that anything should be done outside of accounting rules or laws by any means. It just means that it is quite different working as an accountant for a Fortune 500 company than it is working for a startup and some people just don’t have the ability or desire to work in such a fluid environment.
Since startup cultures are drastically different from established companies, those with startup experience will be used to working in an environment with a lot of uncertainty and little direction or supervision. A startup often requires working at a fast pace, the ability to grasp new concepts and responsibilities quickly, and the ability to see what needs to be done and the willingness to do it, even if it is not part of the person’s job description.
Jeff Nock‘s Fifth Tip: Leverage Technology
Leveraging technology involves looking at what financial technical resources will help the startup grow and what resources will help the startup optimize operations, both internal and external. Thinking beyond physical hardware and software applications, startup leaders should consider how technology will be used and leveraged. Cybersecurity risks are prevalent today and financial data, just as customer data, must be kept secure, especially when investors are involved. Establishing procedures for secure financial data storage to customer relationship management, these security procedures and strategies should guide the purchase of financial technology-related resources.
While many startups use Excel spreadsheets and other rudimentary tools, it is important to quickly migrate to a secure cloud-based platform like Quickbooks. By using such a third-party platform that is focused on maintaining data security and constantly upgrading features, business owners can securely input and access accounting data 24×7 wherever they can access the Internet.
With more than 30.7 million small businesses and startups in the United States as of 2019, cash flow and revenue management is an important key to long-term sustainability. Approximately only 20 percent of small businesses are still in existence after five years. Ensuring the business idea and strategy is viable and sustainable in the long-term can be more easily accomplished by implementing Nock’s tips.
Jeffrey Nock‘s experience includes being the CEO of multiple companies, part of multiple successful startups and as CEO and Founder of Prescient Consulting, LLC. His company has helped over 200 companies that are in the early stage of development, as well as mid-cap companies. As an experienced consultant, Nock strives to assist organizations with achieving visions and growth objectives through services such as mentoring for the C-Suite, strategic and financial planning, business planning, business model ideation and evolution, competitive niche analysis, business development, operational efficiencies, and brand evolution.
Nock‘s repertoire also includes growing startups, growing nonprofit organizations, and helping established companies achieve new growth targets. His skills include leadership development, strategic planning, business development, financial oversight, and presentation development. Outside the consulting world, he enjoys spending time with his four children, supporting his children’s events, participating in physical fitness activities, reading, watching sports, and finding ways to give back to his community.