By Dave Rosenberg, Head of Business Development and Private Equity, EMEA, Oracle NetSuite
Access to capital is undoubtedly one of the top reasons businesses fail. As a result of the current climate, 40% of UK startups have now delayed imminent fundraises, and 40% have a cash runway of a year or less, according to LocalGlobal. Startups are unique – they may be pre-revenue, VC-backed, grants-funded or self-funded, but working capital is a commonality amongst all.
Securing additional funding may be the answer for some but won’t be the solution for every business. The government loan route is one option, but not all startups will meet the qualification criteria. Meanwhile, 41% are considering taking on VC debt.
But what can a company do when external funding is not readily available? There’s a multitude of factors that fledgling businesses need to consider right now, but here’s a guide to what steps should be prioritised:
Conduct a Business Model Assessment
Map out a comprehensive situation analysis of your business, including a thorough assessment of what has and hasn’t changed, and what is and isn’t currently working. How have your operations changed, and what do you need to do differently in order to move forward?
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Implement weekly tracking and measurement around your key performance and business indicators. Metrics are going to be the key markers to not only measure your current state but also help you make decisions on what to do next.
Get your financial house in order
Pandemic or not, many startups have a short cash runway. Build up each of your cost lines from scratch, take stock of the resources in reserve, pending liabilities and outstanding receivables, then make an estimate of how much cash it will need to sustain operations for a variation of timeframes, from weeks to months. Importantly, know when cash is arriving. More than ever, late payments could have profound knock-on effects. Dig into the contractual and payment terms and use software to automate your receivables cashflows, so you can chase late payments sooner. Closely linked to cash flow is cutting spend where it makes sense.
Explore whether you can renegotiate workspace rent or reduce your business’s physical space requirements. Reallocate existing budgets – particularly for travel and events – towards activities that will help engage new and existing customers. But think carefully about how you attract new customers that will be hard to monetise right now. Cutting digital ad spend is a sensible place to start but not if online advertising is your primary lead channel.
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Forecast, forecast, forecast
Forecasting is difficult at the best of times. For a view on the best way to move forward, work back. Based on the patterns of the last weeks and months, estimate where you could be in 6, 12 or 18 months. Build out a handful of scenarios with small margins for error – base them on reality and a range of potential outcomes.
Forecast for sales, expenditure and cash flow and regularly retest your assumptions. While software-based organisations may be less affected, product-based startups are affected by supply chain interruptions and will need to account for higher losses.
Hone in on top performers and re-model
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Set KPIs that are specific to boosting the productivity and efficiency of top performers. Take the difficult, but necessary, decision to ‘switch off’ product or service lines that are unlikely to deliver a healthy return within the forecasts you have set.
This is also a great time to analyse your database to ensure customers are tagged correctly in your CRM system. Right now, subscription or license-based offerings will be more appealing to customers and prospects than large, one-off costs. Consider promotions that ensure cash flow remains consistent. At pre-revenue stage, the free-mium approach is commonplace to attract customers. If your product or service is delivering continued value to customers, set expectations that it is worth their investment.
Balance immediate cash flow needs with talent requirements
Payroll reductions while uncomfortable may be required for your survival. Ultimately, startups need to walk a fine line between trying to immediately improve the balance sheet with retaining the right talent for delivering the next phase of their journey – particularly if that involves harnessing the skillsets that will help deliver maximum value from new and existing customers. Talent is critical to startup culture, so it needs to be carefully managed through this time.
Get creative and innovate
New challenges bring new opportunities for startups. See where your products, services or expertise can be applied in new scenarios.
What may be seen as a food delivery company, for example, may actually have the underlying infrastructure to handle complex logistic requirements in other industries.
Be prepared: Do the hard work now
Funding will return, whether startups pursue it now or later. But one thing remains true – do your due diligence across cash flow, forecasting and key KPIs now. Valuations are dropping and some investors will look to protect themselves in this changing landscape.
Prepare for closer inspection from investors. During periods of growth, some level of inefficiency is tolerable, but when companies need to contain costs, it simply isn’t an option. Eliminating inefficiencies by redesigning sloppy processes and automating manual tasks now can put startups in a more favourable light in the eyes of investors later.
Nobody knows what a post-COVID world will look like, but startups have options, after all, they will be central to powering the UK’s recovery.
Their ability to adapt fast, make decisions quickly, and find creative solutions puts startups in a good position, and by taking the steps above, cash flow can be managed, and business resilience can be built to ensure startups cannot only survive, but thrive throughout unprecedented circumstances.
Read the full free guide here: 7 Actions Businesses Need to Take Now