The start of the year is always a good time for taking stock of your business and setting goals for 2022. Before you protest – I am fully aware of just how changeable the current situation is, but without having goals, how do you know whether your business is performing well? Building financial resilience within your startup or early-stage business needs to be one of your goals for 2022. Here are the reasons why.
What is Financial Resilience and Why do you Need it?
According to consultancy firm McKinsey, resilience is “the ability to withstand unpredictable threats or changes and then to emerge stronger.” Granted, that’s a tall order. Especially if you are a startup founder or you are part of an early-stage business, it may seem like that’s simply asking too much.
The truth is if you’d like your business to survive the year and beyond, you don’t have a choice. You need to start working on making your organisation more resilient. One of the key areas to focus on is your financial situation.
Financial resilience means having enough cash or reserves to deal with financially stressful events. Depending on your business those threats may vary. But looking at the Scottish economy over the past year or so, many businesses had to cope with disrupted supply chains leading to delayed orders. Potential customers may have had to cancel orders due to their own financial situation. Disgruntled customers may have cancelled orders if they became too badly delayed.
In either of those situations, a financial reserve would be a lifeline for the business. It could make the difference between the business retaining the ability to grow or barely surviving.
How To Build Financial Resilience
So, how do you build financial resilience in a startup or an early-stage business? Here are four strategies:
- Understand Your Current Financial Situation
- Create a Cash Reserve
- Improve Creditor and Debtor Relationships
- Keep An Open Mind for New Opportunities
1. Understand Your Current Financial Situation
This may sound obvious, but too many startup founders and leaders are unaware of the company’s financial situation. It’s almost impossible to make sustainable business decisions without having this knowledge.
If you haven’t already, become familiar with basic finance and accounting terms (more in our next blog) and what they mean for the company in the short, medium, and long term. You may have cash in your accounts now, but that might not be enough. If a large payment is due next week whilst your customers have another month to pay their bill you may be in trouble.
There are lots of tools available to help you with understanding, but a good accounting system sits at the heart of it. Although there are others, Xero is the one we recommend. Once you have the data in there, it can feed into forecasting tools such as Float to give you forward visibility of cash flow.
2. Create a Cash Reserve
It’s only natural for new-ish businesses to re-invest all the money that’s coming in from your first orders into the business. But one of the most useful tools to help you weather an unexpected storm is having a cash reserve.
Consider this to be your emergency fund and separate it from the money you use in your day-to-day operations. If something unexpected happens (another lockdown or tight restrictions on businesses, for example), this cash reserve can help you out of a tight spot.
If your forecasts indicate that you need to raise money, then start looking sooner rather than later. For example, if you still have 6 months until you run out of cash, then you can build a good investment case and look for the right funding. However, if you only have 6 weeks then you are already on the back foot. In this case, you may need to take funding because it’s quickly available rather than considering the long-term impact.
The form this funding takes varies with your business and needs. You could consider selling more shares (i.e. equity) or borrowing either over a longer period (loan) or a shorter one (overdraft). It’s important for financial resilience to get the right funding for your situation. Making the wrong decision here can put the whole business at risk later.
3. Improve Creditor and Debtor Relationships
As a new business without much of a track record, you are unlikely to be offered the best payment terms by your suppliers straight away. Remember that those payment terms can be renegotiated. Once you have shown that your business pays its bills reliably and on time, approach your suppliers and see if you can agree on better terms.
Compare the terms you get from your suppliers with those you offer your customers or creditors. Is there a mismatch? If you are allowing customers 60 days to pay your invoices whilst you need to pay your suppliers by the end of the month, you are putting your business at a disadvantage. Consider changing your payment terms or offering an early-payment incentive. This can really make a difference to your cash flow.
4. Keep an Open Mind for New Opportunities
If you are in a startup scenario, you’ve surely heard the term pivoting, i.e., changing the direction of the business. As a founder, it is often hard to let go of your initial big idea. But it is worth keeping an open mind to see whether your idea would benefit from some adaptation.
The past two years have forced more or less every business to change course in some way or another. Many of them are finding that this change has been for the better. Of course, there is no need to follow every trend. However, being open to new ideas will help your business grow and become more resilient.
Ask For Help
Even if your startup currently consists of you and a big idea, you don’t need to take every decision by yourself. The same is true for founders who feel they have the weight of the world (aka their team) on their shoulders.
Ask for help! Whether you join startup forums to meet other founders or work with a consultant on certain aspects of your business, it helps to get input from a neutral perspective. If you need help with the financial aspects of your business, don’t hesitate to get in touch. We can work with you remotely or in person, on a rolling contract, or as and when required. Financial resilience is worth the time it takes to build!