The importance of good cash flow for start-ups: a conversation with Saija Mahon
Four in ten start-ups fail in the first five years of the business and a significant factor behind that high failure rate for early-stage businesses is a reluctance to manage cash flow effectively.
We sat down with Saija Mahon – founder and MD of Mahon Digital Marketing, business mentor and speaker on the international start-up conference circuit – to talk about start-ups attitude to financial management, spending investors money and why getting a handle on cash flow should be every founder’s key focus in the early years of the business.
Setting the right financial foundations
The initial years of running a start-up are a challenging time for any founder. There’s the excitement of creating your business idea, getting it off the ground and seeing those first sales rolling in.
But what many inexperienced entrepreneurs forget is the need for rock-solid financial foundations.
As a business mentor and a speaker at start-up conferences around the world, Saija Mahon has seen first-hand how a good start-up idea can be held back by poor cash flow – and how relying on cash from an investor can actually be a bad idea for some start-ups.
“I see this lack of cash flow management all the time, where start-ups don’t focus on getting financially stable. Many get so excited about their new product or offering – which is obviously great – but then they get lost in the investor world and forget about their core customer who would buy their idea, product or service in the future.
That pot of investor money is finite – ultimately you need customers to buy your products.
One part of this, certainly from what I’ve seen, is that start-ups don’t focus on the customer enough, or building up their go-to-market strategy – they think that the investor will pay anyway.
Yes, in the short-term, that works but not in the long-term if you want to be here in ten years time. You can’t just think that your investor will always be here, because they won’t.”
Investor money is a finite pot of cash
In the entrepreneurial world of growth hacks, pivoting and hyper-growth, it’s easy to see how start-up founders can be lured into thinking more about investment money than day-to-day income. But to quote the well-worn phrase, cash flow truly is the lifeblood of a healthy business.
If cash flow is the lifeblood of the business, then an investment round is a blood transfusion. It gets cash into the system when it’s missing, but it’s always going to stop at some point. That’s something that founders need to take into account, according to Saija.
“Start-ups tend to not think of the cash flow, and the customer base who will bring in that cash flow. They see cash as coming from the investor, and in the long-term, that’s wrong.
There’s education needed in the start-up community on cash flow, for sure. I hope I can bring my thoughts forward, and I hope other business leaders will too, as there are so many start-ups that get caught up in these problems with cash flow.”
Learning from others
“Many start-ups do fail," says Saija, "The research shows this. But, you can learn from other people’s mistakes. Start-ups should look at how other start-ups survived the A&E growth phase, rather than going through everything on their own.”
Being part of a network of other start-up owners and entrepreneurs can also provide a pool of business experience. That’s an approach that has certainly helped Saija and the other founders in her networks.
“I’m part of many groups and networks for entrepreneurs, and we exchange ideas and we share failures and mistakes etc. to make sure that if you’ve made a mistake, then I don’t have to make that same error. I can learn from you, or I can share a shortcut that you can utilise so we both succeed.
Especially in the start-up world, it’s very important to have a mentor – someone who’s seen it, done it and can advise you, and not just give you money as an investor. If that money doesn’t come with support, mentoring or consultation, you can burn through that money very quickly.”
The cash flow needed for growth
Getting paid on time is one key way to get cash into the business and improve your start-up’s cash flow. And Saija has personal experience of how moving to GoCardless and Direct Direct can boost cash flow and reduce time-consuming admin of chasing up your late invoices.
“Automated cash collection with GoCardless removes the need for awkward conversations with customers, saves time and it obviously helps cash flow – that’s a huge thing! But it also means you can focus on growing the business and not spend time trying to get the money you’re owed.
We invest in our growth, and obviously we need money coming in at a reasonable time to do that and to ensure that our three offices continue growing and I can continue paying salaries, hiring people and keeping jobs in the business. But it’s all tied in to cash flow, of course, and it takes a huge amount of stress away from the business owner.”
Driving a change in payment culture
So, does Saija think that start-ups can change their habits and start putting more attention into improved payment options, better customer focus and a stronger cash flow position?
“Direct Debit and automated cash collection is not yet the standard. But hopefully change is happening right now. As entrepreneurs, start-ups and businesses, we need to move onto this automated way of paying. That way everybody gets paid, everybody’s cash flow is better and everyone has more money available – because no-one is holding up that chain of money. If we all change to this seamless way of paying, the money will start flowing around a lot better!”
Putting cash flow management on the to-do list
If you’re a start-up founder, or an entrepreneur starting out on the business road, the advice from Saija and many other experienced entrepreneurs is clear.
Ensure you’re clearly focused on the needs of your customer and building that steady pipeline of sales, income and cash – and don’t be tempted by the allure of investor’s money until you’re 100% confident in the day-to-day financial stability and cash flow prospects of your start-up.