Most startups die. This is the reality of the early-stage ecosystem. Various sources peg the mortality rate of startups between 75% and 90%. There are various reasons that can be attributed to this such as lack of product-market fit, timing, and paucity of funds. While not everything is in the entrepreneur’s control, some things are. One of them is managing their business’ runway and balancing growth.
The entrepreneur has a tough job. They have to manage multiple stakeholders, raise capital, conduct business and ensure that it continues to survive and grow. However, external factors (like COVID-19) may sometimes throw a wrench in their plans. They have to preserve capital for this very reason - to make it available for a rainy day. There are various strategies available at their disposal, and entrepreneurs must choose the one that fits their style and business model.
There are two primary ways any business can manage their cash flow - either by increasing inflows or decreasing outflows and in an ideal world, both. Businesses are complicated and it is seldom possible for startups that have not established their brand or product in the market to increase revenues without investing in marketing or offering credit to their customers. However, they may be able to increase their cash flows by experimenting with pricing and offering cash discounts. While increasing revenues in a short period may be a challenge, cost structures offer much greater flexibility to the entrepreneur. The rule of thumb for managing cash is to keep costs in line with revenues, i.e., scale costs only when there is visibility of revenue increasing, especially marketing and salary costs. This can be done by pushing recruitment timelines, cutting experimental budgets and most importantly, marketing spends, cash backs and discounts.
A successful business showcases many characteristics and the strength of their cash flows is of paramount importance. Startups have a long way to go before they can enjoy predictable cash flows like their mature counterparts and entrepreneurs have to find the right balance of cash conservation and growth to ensure a longer runway for their business. Cash, for startups, is not only king. It’s a breath of life.