How should startups ensure sufficient funds to maintain operations to profitability? (Part 2)

In my last blog: How should startups ensure sufficient funds to maintain operations to profitability? (Part 1), we talked about:

1. Obtaining Funding
2. Cost Control
3. Revenue Generation: How do Startups focus on driving revenue?

Whereas in this blog (Part 2), we discuss the following:

4. Cash Flow Management: How can Startups monitor their cash flows?
5. Financial Forecasting: How do Startups anticipate their funding needs?
6. Alternative Financing: What are the supplementary funding resources for Startups?

Cash flow is critical for any startup as it directly impacts the company’s ability to run its business, pay outstanding expenses, and fund business development. Startups must understand and practice effective cash flow management:

• Cash flow forecasting: Your cash flow forecast should provide detailed projections of all expected cash inflows (e.g., sales, accounts receivable, government subsidies, investor injections, investment returns) and outflows (e.g., payroll, rent, prepayments, channel incentives, utility payments, government registration fees, corporate taxes, loan interest, inventory, IT services, cloud and network expenses, business development expenses) over a rolling 18-24 month period.
• Invoicing and collection: Ensure timely invoicing and enforce collection of accounts receivable. Reduce order-to-cash cycle.
• Inventory management: Control inventory levels and perform effective just-in-time inventory management to minimize funds tied up in unsold goods. Negotiate favorable payment terms with suppliers and upstream partners.
• Expense control: Compare pricing plans from different suppliers, prioritize expenses, and manage them. Always negotiate better terms for any services payable with any supplier.
• Financing options: Thoroughly research and choose the most appropriate financing options to maintain your runway.

Always consider every penny spent and carefully implement cash flow management to minimize the risk of cash flow crisis and maintain a better sustainable development position.

Forecasting Financial Funding:

• Detailed financial model: revenue, expenses, cash flow and balance sheet items showing the breakdown of revenue into specific products, services or customer segments to understand the drivers of the business; estimate one-time and recurring expenses based on historical data, market benchmarks and expected growth plans.

• Matching funds to achieve milestones: product development, listing, new product launch, promotion and marketing, market expansion or achieving profitability.

• Funding options and use of proceeds: always set up backup plans for the worst case during the fundraising process, and include sufficient contingency plans and cash buffers during market downturns and delays in capital injection.

• Funding sources and options analysis: carefully evaluate the sources of funds and financing costs among all available options, including issuing new shares, shareholder loans to the company, ESPP, angel investment, high net worth individuals (private investors) injections, crowdfunding, venture capital (VC), incubators and accelerators, government grants and subsidies, bank loans and credit lines, corporate venture capital.

• Monitor and fine-tune financial forecasting models based on financial performance.

• Work with professional accounting and financing advisory experts: Assist in evaluating the effectiveness of your financial forecasting model, revenue generation model and business execution model.

Remember that forecasting financial funding needs is an iterative process that requires a deep understanding of your own business, trends and variations in financial data, effective communication with investors and sincere discussions.

Alternative Financing: What are the supplementary funding resources for Startups?

In addition to and beyond traditional venture capital and bank financing, there are numerous of supplementary alternative funding sources include:

• Crowdfunding: This is most common in some parts of the world, but it is important to ensure that crowdfunding activities meet regulatory requirements.
• Angel investors: Funding from high net worth individuals or PIs (private investors) in exchange for equity in the startup, the most common being SAFE.
• Incubators and accelerators: Ensure that the program has a financing element in addition to providing mentorship, workspace, and access to a network of investors and resources.
• Government grants and subsidies: From local or overseas government programs.
• Corporate venture capital: Large corporates invest their money in startups, often with strategic partnerships and exclusivity as prerequisites.
• Peer-to-peer lending: Can be an alternative to traditional bank loans, especially for startups with limited collateral or credit history.
• Convertible notes: A short-term debt financing that can be converted into equity at a later time, usually in a future funding round, providing startups with funding without an immediate valuation and reducing equity dilution.

In order to shorten the financing path and reduce financing barriers, it is necessary for start-ups to hire experienced financing consultants or use professional consulting companies to carefully evaluate the pros and cons of each source of funds, conduct due diligence on the sources of funds, provide professional advice, and select the source of funds that best suits their growth strategy and financial needs.