Typically, nine out of ten startups fail within the first few years. Although the reasons are not always the same, there are some key problems which can be identified across the board. These challenges have been greatly magnified by the unprecedented effects of COVID-19 and the ensuing lockdown. The whole entrepreneurial ecosystem has been transformed and it is getting increasingly difficult for small businesses, start-ups, and budding entrepreneurs to flourish.
One of the fundamental problems affecting startups right now is cash-crunch or negative cash-flow. Some of the main causes of negative cash flow are:
- During the early days of a start-up, the expenses are almost always going to be higher than the revenue generated, often causing a cash-crunch and liquidity issues.
- Supply chains are often inefficiently designed, causing cash-flow issues.
- Marketing expenditures can often initially be unnecessarily excessive, causing a hit to cash-flow.
In order to forge ahead with their businesses, many entrepreneurs endorse considerable Research and Development (R&D) and increase their marketing efforts to substantiate their customer base and product reach. On most occasions, the only viable option for start-ups is to spend more than their revenues can offset, to reach their primary goals and objectives.
It is therefore vital for entrepreneurs to have a viable, ambitious, yet realistic plan that enables them to push forward and accelerate growth, minimizing the effect on cash reserves. The following strategies can help new businesses overcome these issues:
- Management of fixed vs. variable expenses
Fixed expenses are those which are incurred regardless of whether the start-up generates a single unit of sales, i.e. rent, salary, equipment costs, etc. Variable expenses are those which are related to transactional volume, i.e. expenses like direct materials, production supplies, shipping expenses, etc. These can be scaled up and down according to the activities and the overall strategy of the organization.
It is vital for successful start-ups to convert more of their fixed expenses to variable expenses to ensure that it makes the most of the time value of money. Utilizing the time value of money is key to start-ups, as money that it has now is always worth more than the identical sum in the future due to its potential earning capacity. This enables them to maximize liquidity whilst at the same time extending the runway.
An example of converting fixed expenses into variable expenses is promoting employees to Bring Your Own Device (BYOD) instead of purchasing devices/laptops with full payments by the organization.
- Minimizing non-essential expenses
It is key for any budding business to properly utilize its cash. Many organizations make the mistake of taking on too many non-revenue generating expenses at its early stages, such as splurging on non-targeted advertisements and running inefficient campaigns which do not gain sufficient traction. Another way to cut down on non-essential expenses would be to manage and complete tasks in-house without excessive outsourcing. This will also enable efficient and maximum utilization of in-house resources.
- Efficient fund management and reducing cash conversion cycles 6
Start-ups must negotiate with both their customers and suppliers at the same time, during this crisis, to improve its Cash Conversion Cycle (CCC). The CCC can be improved by converting inventory and other resources into cash sales. Maintaining mutually beneficial relationships with its customers to recover receivables within a shorter cycle could make or break the future of the company. On the other hand, entrepreneurs should also try to introduce Just In Time (JIT) inventory management systems and convince their current suppliers to extend their payment schedule. This allows the company to effectively maximize its cash reserves.
- Increasing productivity and ensuring optimum usage of its human resources
Start-ups must make sure that their human resources are optimally used. They must ensure that staff within the organization carry out tasks which they are best suited for, whilst inter-departmental cooperation is seamless. Making sure that each staff is working to the best of their abilities and in the right role shall ensure companies can maximize productivity. This downtime could also be used for capacity building of staff; an easy and good way could be through the many online trainings that some of the major online platforms, such as Coursera, Udemy, and BYLCx, are offering for free or at reduced prices. This enables companies to make the most of existing resources, rather than spending more on additional staff.
Without adapting to the current scenario and bringing about these changes, start-ups across the landscape are destined to fail more often than not. In the current COVID-19 ecosystem, it is key to increase organizational efficiency and utilization of existing resources, and to make the most of the assets the business owns or rents. This will enable start-ups to maximize their cash reserves and increase their runway.