How startups can keep on top of cashflow management

When Kevin Whitmore’s fintech startup Cost Optics experienced growing pains in 2014, it wasn’t for a lack of customers – or revenue.

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The Singapore-based company helped banks based in Hong Kong, Singapore, New Zealand, Australia and London manage their expenses for high-cost services like the market data feeds crucial to their financial decision making.

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“It was trading desk equipment, Bloomberg and Thomson Reuters terminals, where the cost of renting one is more than a lease on a Porsche,” says Whitmore, a serial startup founder and business innovation advisor at Callaghan Innovation.

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“When we were generating up to $1 million in revenue, I could pretty much do all the sums in my head,” says Whitmore.

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“It was relatively easy to use an Excel spreadsheet if you wanted to know what your burn rate was and how the business was tracking. It was all pretty straightforward.”

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Growing pains

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But as Cost Optics’ annual revenue grew to $2 million and then $3 million, managing the company’s cashflow became “a lot more complicated”. Many New Zealand startups have done well by employing the SaaS business model, which allows them to accurately model their monthly recurring revenue (MRR) as subscriber numbers are projected to change.

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But selling hardware, or professional and consulting services can be a more difficult proposition, with payment schedules less predictable and contracts varying in terms and length. Lumpy revenue and poor cashflow management were in part to blame for the collapse of NZX-listed security software company Wynyard Group, which was put into liquidation in 2017.  

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Cost Optics was offering a mix of professional services, consulting, and software and the strain began to show.

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“We had multiple revenue streams, stop-start contracts, salaries changing everywhere. I struggled to see where the future was in terms of the flow of cash. I couldn't put my finger on that burn rate any more,” says Whitmore.

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It’s a common problem for startups, which are as likely to go insolvent due to poor cashflow management as they are a lack of paying customers. Whitmore’s father was the company’s CTO at the time and came up with a quick fix – a workflow based on the Microsoft Access database software that offered rudimentary cashflow modelling.

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“It took all that complexity, all the moving contracts, the start-stop salaries, all the stuff that was happening, and it produced a nice time-bound set of ins and outs for the business so I could put my finger on what the cash balance would be in two weeks’ time, three months’ time, whatever,” says Whitmore.

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Every week, with the input of his bookkeeper, Whitmore would sit down and use the tool to recalculate and re-forecast cashflow based on the status of customer contracts and company expenses. It solved the cashflow forecasting headaches, but some damage had already been done.

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“We ended up having to let go of a bunch of staff, which was really, really hard,” he says.

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The founders decided to wind the business down in 2016.

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“I woke up one day and decided my heart wasn't in saving banks money,” says Whitmore, who opted to return to New Zealand to get involved in the local startup scene. In the intervening years, several cashflow modelling tools have appeared on the market – Flightpath, Float, and Planful among them.

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‍Beyond Xero

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Xero, the ultimate Kiwi startup turned global behemoth, has its own cashflow forecasting feature. But Whitmore says Xero’s tool has limited functionality.

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“There's not a lot of relational structure behind the data that Xero collects; it’s mostly transaction based,” he explains.

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“So when they try to connect it up and make anything meaningful, they struggle, and they've admitted that. So the opportunity is to take that data and mould it into something that is useful for modelling and forecasting. That’s what we've done.”

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Whitmore’s latest startup, Cashbucket, aims to give small, fast-growing businesses the tools to easily handle cashflow management that his father hacked together in an Access database a decade ago – with some major upgrades. Cashbucket interacts with Xero, importing financial reports via an API, with a similar connector in the works for Quickbooks, the accounting package from Intuit, Xero’s main rival in the US.

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The app is aimed at businesses generating annual revenue between $2 million and $15 million and that are dealing with uneven revenue streams that may be from multiple lines of business.

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“This is really suitable for professional services, the ones with lumpy big-ticket items where you worry at night whether you can make payroll, and you want to prioritise certain payments ahead of others and get all the timing right and not have opaqueness,” says Whitmore.

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Cashbucket costs $69 per user per month ($690 for an annual licence) and includes automated 12-month forecast creation daily, transaction-level cash management, monthly cash balance reporting, and a single dashboard to display a company’s current and future cashflow positions.

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Startup founders told Whitmore they still wanted to tinker with their financial modelling in Excel, so he designed Cashbucket to be compatible with it. Whitmore sees artificial intelligence playing a role in Cashbucket in the future, including for anonymously pooling of data from participating users to allow similarly sized companies to benchmark themselves on cashflow measures.

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Adrian Guttridge of business process management company WNS; Ben Gracewood, former chief engineering officer at Vend; and Sasha Lockley, co-founder and CEO of Money Sweetspot, make up Cashbucket’s advisory board. Whitmore and his co-founders have bootstrapped Cashbucket to date and aren’t currently looking for seed funding.

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“We don't really need it at the moment because we’ve built the initial product. But I think once we get all that feedback and customers on board, it will be decision time around raising money,” he says.

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Cashflow crunches have claimed numerous New Zealand businesses this year, particularly in the construction, retail and hospitality industries.

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“Our business almost went bust and I see businesses going bust on a technicality because they didn't quite manage the cash properly,” says Whitmore.

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With Cashbucket, he’s aiming to help fellow Kiwi founders avoid the same fate.

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Cashbucket’s six tips for avoiding cashflow nightmares

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1. Identify essential vs non-essential expenses

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There will be products and services that make sense to consume when in growth mode but can be shut off when cash is tight. Know what these are so that you can flip them off to lean-up when required. Having a grasp on these over time will allow you to quickly adapt and flip in and out of tight versus growth modes.

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2. Know the timing of incoming and outgoing payments

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This isn’t just a ‘they pay on the 12th’ type of understanding; this means understanding in detail what the sequence of events and timings should be. Have a plan. Execute on the plan and chase when it strays from that plan. It’s not one person’s problem if the business runs low on cash or solvency is called into question; it impacts the entire business.

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3. Implement a robust cash management process/financial control

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Businesses can also alleviate short-term cash constraints by improving their cash management processes. This can include implementing a robust budgeting and forecasting system, using financial software to track expenses and cashflow, and regularly monitoring the company’s financial performance. By improving their cash management processes, businesses can identify areas where they can reduce expenses, increase revenue and improve financial stability.

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4. Shore-up incoming payments

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Incentivise prompt payment from customers by offering discounts for early payment or implementing automatic payment systems. By improving the accounts receivable process, businesses can increase their cashflow and reduce financial constraints.

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5. Secure access to a short-term credit facility

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This can include taking out a loan or line of credit, or seeking investors who are willing to provide capital in exchange for equity in the business. By securing additional financing, businesses can access the funds they need to cover their financial obligations and improve their cashflow.

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6. Don’t count unsigned contracts

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Other scenarios include the classic ‘95 percent sold’ conundrum of expecting cash to come in from a new customer that is most of the way through your sales pipeline. There’s no such thing as 95 percent sold. Signing up a customer is a binary ‘yes’ or ‘no’ and counting 95 percent of the revenue can put your business in an unfortunate position if you are relying on cash and business that doesn’t eventuate.

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