Cash Management at Startups – the need to take a holistic view

Cash Management at Startups – the need to take a holistic view

Mani Padmanabhan

Finance Leader/Virtual CFO; Founder Vanman MA, Partner Peachtree

---

Finance is the common currency of all businesses and Cash the most liquid of this currency. 

Emerging significance of Cash Management

Every now and then phrases like ‘Cash is King’ or ‘Cash is the most supreme measure’ have echoed in the business corridors. The one most important measure for key decisions; be it project evaluation, M&A or investment decisions, has always been ‘Cash generation’. Cash generation is usually represented in the form of monetary assets (not vague / illiquid assets).

Profit, as a measure for key decision making, has always taken second place. Why is this so??

Cash as the most fundamental measure of financial evaluation

Cash generation is the most holistic measure, as it considers the net result of all business transactions and brings it down to a common denominator. It does not just measure profit alone, but also factors in the cash locked up in working capital and in capital investments; whilst measuring business results. At the end of a project cycle, cash generation is thus the free cash available with the business after all transactions are converted back to cash or its equivalents.

Important metrics such as IRR, NPV further consider the time value of this cash generation and are considered for decision making in key investment matters. Cash generation is most easily understood as there are no opinions in it – its presence or absence will show up!!

Get our free weekly newsletter with latest articles and updates on new training programs.

Cash is reality, while Profit is an opinion.

Cash management and Startups in the ‘new normal’

Cash management is the one thread that connects a great product, the aspirations, to its ultimate success. Needless to say, the concept of cash management is different for large entities compared to Startups. While in the former it is more about managing the cash reserves optimally and rotating cash better, in the latter it is much, much more.

This new normal has forced all businesses to re-think and re-position themselves, look at adjacencies and pivot their business models where required. The one asset that needs to be managed best in this turbulent and volatile period is Cash.

In this ‘new normal’ cash management has become most important for startups and small businesses as these organizations tend to have limited access to cash and the need for cash for growth is also very high here.

Facets of Cash Management for Startups in the new normal

  • Optimal planning and building cash efficient business models
  • Optimal deployment of cash which is not about just holding and preserving cash but using it to its best effect.
  • Optimal sourcing and management

If optimal planning sets the boundaries, optimal deployment makes the best use of every penny. This is not a regressive facet, one that is bent on squeezing and reducing cash burn, but is actually one that optimizes cash.

Optimal sourcing has never been more important. Knowledge of alternate sources and avenues of cash is most important in this so-called uncertain phase.

And of course, managing the cash – extending the runway, finding alternatives pivoting business models, finding business models with shorter cash cycles et. This is the business / operations face of Cash management.

Be Cash Smart – embrace good cash management policies

Cash Management is a ubiquitous part of business management- a common binder; a glue, that keeps things together. It is about money but not only about money. There’s more to it; a predictive side, a management side and a governance side.

Startups and SMEs invariably have small core teams; the entrepreneurs are often not too conversant with cash management. In their struggles to build the businesses with limited resources, quality cash management tends to take a backseat and thus leads to many a failure.

Let not the absence of good Cash management derail you. Instead let its presence lift you.

On 3rd July, 2020, Mani Padmanabhan conducted a webinar at our online learning platform, learning.infinumgrowth.com, on Cash Management for Startups and SMEs.  He will be soon conducting a workshop for startups and SMEs on this subject, to deliver a more detailed learning.
To get the details of the workshop subscribe to our weekly newsletter at the subscribe Now box on this page.

Please do leave your comments at the bottom and do share with others if you like this article.

2
Leave a Reply

avatar
2 Comment threads
0 Thread replies
2 Followers
 
Most reacted comment
Hottest comment thread
2 Comment authors
Jitendra RahiGanesh Kumar R Recent comment authors
newest oldest most voted
Ganesh Kumar R
Ganesh Kumar R

Very informative article Mani !Thanks!

Jitendra Rahi
Jitendra Rahi

Very well presented and explained. Optimising Cash with effective cash management is the need of the day for all businesses, big or small. It’s the one most critical resource which needs to be managed well.

---