How to Avoid the Cash-Flow Woes That Kill Startups

Countless factors must align for a startup to be successful. A founding team must put a realistic business plan in place, set long-term and short-term goals, secure ample funding, build the right team, and ultimately execute the fledgling company’s vision. Despite the fact that there are so many variables, there’s one item that causes more startups to fail than all of the rest — finances. In 2022, 47 percent of startups failed because of a lack of financing, while 44 percent claimed they straight-up ran out of cash.

Here are a few tips for startup teams to avoid the cash-flow woes that killed so many of their peer enterprises one short year ago.

1. Track Finances Daily

Startup teams must track everything and stay on guard for concerning behavior on a daily basis.

Unfortunately, startup teams don’t always have the bandwidth for such a minute level of detailed analysis. When that’s the case, it’s probably time to hire an accountant or financial team. If you’re not quite ready to grow your team yet, you can look into outsourced financial services.

These third-party solutions can function as a full-suite startup finance department. For instance, startups like Uride, Avalon Fund, and Chainsafe Systems used AquiferCFO to streamline and optimize their finances early on in the startup phase.

If you’re on a startup team, either you or a third-party partner should be tracking and analyzing your spending on a daily basis. Don’t excuse expenditures as “necessary items” and then ignore their impact. Compare income and seed money with outgoing expenses and make sure you understand the length of your financial runway at all times.

2. Avoid Overspending and Larger Unnecessary Expenses

It may be worth it to invest in a third-party accounting firm when you know the investment will pay for itself quickly. However, now may not be the time to hire an entire marketing team or bring on a chief sales officer.

If you’re very early in development, you may not even be thinking of sales yet. In that case, you want to consider the cost of things like office space and tech stacks. Where is your overhead going? Are you a tech firm with too many engineers on staff? Are you a gaming startup pouring too much capital into a design team?

It’s important to keep the C-suite particularly lean during these early stages. Harvard Business Review lists seven major C-level jobs, including newer titles like the chief information officer and chief supply-chain management officer. While these have their place in a thriving business, you shouldn’t invest in them too soon if you want to avoid cash flow concerns. Instead, look for those fractional, third-party support solutions (see the previous item). 

In the same way that you should watch your daily expenses, make sure you aren’t missing the forest for the trees, either. Step back from time to time to get some perspective and keep tabs on your startup’s larger spending trends.

3. Maintain Transparency and Communication

Finally, don’t keep people in the dark. Communicate your financial condition on a regular basis to your stakeholders. It’s tempting to shove financial concerns into the closet, but this only creates a more damaging impact if and when that information is revealed. 

It’s particularly important to keep employees and partners in the loop. Startups have close-knit staff, all of whom are collectively taking on significant levels of risk.

Writing for Slack, Devon Maloney highlights how transparency can positively impact business interactions. Healthy communication builds trust, improves efficiency and performance, and ultimately helps you attract better talent to your startup.

From tracking daily financial activity to observing larger spending trends to maintaining transparency and communication, there are many ways that 2023’s startups can avoid the fate of 2022’s corporate dropouts. 

The important thing is that startup teams take the financial issue seriously. Yes, you’re starting a business, and you have a lot of balls in the air at the same time. Just remember that some of them are more important than others.

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