Being in tech is fast-paced and exciting but one key part of running a tech company is managing cash flow. Doing so has two benefits; it reflects positively on the strength of you and your management team and it forces you run your business more effectively. With that in mind, here are four cash flow hacks that every tech business should know. Following these hacks will give you a better understanding of what is important for the success of your business.
1) Get a Cash Reserve
You can never have too much cash on hand. As a leader of a tech business, you should sit down with your team and figure out a plan to build and preserve a cash reserve. Granted, some companies are proud of the fact that they a setting records for their cash burn rate.
But the truth is that will come a time when a company will need to pivot and pivot hard. These are the times that you need free cash. If not, you will need to lean heavily on investors and this could make you extremely vulnerable.
Start today, work with your CFO to map out a cash management strategy that works to increase the number of days’ cash you have on hand. Even a small incremental improvement helps and it sets your tech business on a path of using investor’s money not only to keep the lights on but to push your company into hyper drive.
2) Forecasting Isn’t Just for the Weather
Even in the best organizations, sales forecasting is hit-or-miss. But that doesn’t mean that it is not important. Even in a tech company, your sales team needs to work with finance and operations to figure out the sales forecast for the coming period and then see how this will impact other parts of the business.
If you are expecting a big jump in sales, then you might need to look at hiring additional engineers or expanding your infrastructure – even if you are using IaaS solutions. Sales forecasting is also extremely valuable if your tech company is in a fast maturing market. In these instances, forecasting will provide a heads up on the soft spots in your revenue generation model. This will allow you to be more proactive – possibly redeploying resources or rethinking your sales approach.
3) Get a Money Supplier
For many tech businesses, their sole source of additional funding is venture capital. However, fundraising is often a high-risk undertaking. Many tech companies get derailed while looking for funding. The reason for this is simple, raising money requires time and energy and often distracts founders from running their business.
Another tradition funding option are commercial banks. However, they have become increasingly risk averse in recent years. The reason for this is two-fold. First, most early-state tech companies lack the collateral needed to get bank loans. The second reason is that it is more profitable for banks to write loans of $20 million or more. – this has pushed most business with less than $100 million in revenue out of the fold.
As such, more and more tech companies are turning to alternative finance providers. These financiers focus on up-and-coming businesses and have a multitude of options which can provide growth capital, quickly. If you want to learn more about the disadvantages of bank finance, then check out this eBook on avoiding conventional loans as it gives you everything you need to know on different forms of lending available to you today.
4) Get Paid Early but Pay on Time
If you really want to improve your cash flow, then look at ways to get paid early and then pay your bills as late as possible. This will increase your cash on hand and will make it easier to operate your business on a day-to-day basis.
The easiest way to achieve this is to focus on your revenue model. Can you go to a subscription-based model which helps you to get paid before you deliver your services? Another benefit of this model is that it can turn into a very nice recurring revenue model which will not only reduce user acquisition costs but will get the interests of investors.
About paying on time. Don’t pay early, unless your service provider gives you a big enough reason to do so. It’s not just discounting, but discounting to the point that it offsets the opportunity cost of paying early. Be wise with your cash and you will find that you will have more time to focus on growing your business, not putting out fires.