By Elliot Begoun on Jul 28, 2019 12:00 pm
This article was first published by New Hope
I love to eavesdrop, sneak a listen between founders or between founders and advisors/investors. One of the most common topics discussed is what’s most important, velocity, distribution, or revenue?
I will offer a simple answer to that question. The single most important thing to monitor, know, and plan for is your cash needs.
An early-stage brand struggling to gain traction needs a lot of cash. A brand that has found its tribe and is growing rapidly needs even more. I promise you one thing, whatever you think you need in terms of cash, you have underestimated by a factor of at least 2X.
Every decision you make has a cash implication. Channel, distributor, retail outlet, trade plan, production, inventory, team, everything has a bearing on your cash position. If you aren’t clear as to how a particular action effects cash, then don’t act on it until you understand it fully.
Your go-to-market strategy and overall growth hypothesis should be shaped partially by its effect on cash. There are numerous paths to market, and you can define growth in many ways. How you approach this depends on the amount of money you plan to infuse into the business.
When the latter is not aligned with the former, founders find themselves in trouble. The most common manifestation of this occurs when the growth curve outstrips the available cash.
Oddly, growth is the largest consumer of cash. Outflow always comes before inflow. You build up inventory then pay to ship it to the distributor or customer. You create an invoice but won’t likely receive any funds for 45-90 days. When those funds arrive, they do so minus many deductions.
When founders find their businesses in cash-starved position, bad things start to happen. Short term decisions have long term consequences. Small things like reducing trade spend, not pulling the trigger on a critical hire, slowing down the innovation pipeline all have far-reaching implications. If you plan to raise capital the right time to do it is when you need it the least. If you are desperate and are lucky enough to bring an equity partner into the business, it usually is done at a much higher cost because of the perceived risk.
Sadly, this is also where I see founders put their assets at risk. They max out their credit cards, sign personal guarantees for A/R, P/O, and inventory financing, or ink deals that have a very high cost for working capital.
You can eliminate all of the above with the proper planning. Your cash strategy must be foundational to your overall business strategy. Having a deep understanding of the unit economics, the delta between gross revenue and net revenue in each channel, the order-to-cash cycle and timeframe, and the burn rate are a must. Knowing this gives you visibility as to how the speed of growth effects cash. The rest is planning. You either plan to bring in the capital needed to support the rate of growth or you adjust the speed.
This article is a gross simplification of a very complex subject. Its purpose is as an admonition that you must understand that cash is king. You can do everything else right but, if you don’t plan your cash needs, you will fail.