Managing Cash Flow - What You Need to Know from Michael Tannenbaum, CFO @ Brex

According to many data sources, about 70% of startups fail. One of the main reasons why startups fail is simply because they’ve run out of cash. Although you can extend your startup's runway through bootstrapping or keeping thrifty, many pre-seed startups simply just have poor tracking of their cash flow. Alternatively, some companies raise too much money and burn their cash too quickly. The bottom line is that many startups are struggling to effectively track their cash flow.

Michael Tannenbaum, CFO of Brex, shares some advice on how startups can manage their cash flow effectively.

*This content was adapted from Michael’s interview with Startup Grind.*

9 Tips for Managing Startup Cash Flow

#1. Plan for Success

Always anticipate that your startup's success will attract attention. Utilize appropriate software for various aspects, from cap tables to payroll, to ensure efficient management.

#2. Be Realistic with your Numbers

Implement a monthly routine to thoroughly review your finances. Compare actuals to budget, assess performance  expectations, and establish a foundation for future success, especially as you progress to quarterly board meetings and annual audits.

#3. Keeps Tabs on your Spending

Make budgeting and forecasting a regular practice to facilitate open conversations about financials. Monthly reviews of financial statements help track expenditures and address any discrepancies.

#4. Timing Matters for Hiring a CFO or External Assistance

Recognize the importance of maintaining accurate records for fundraising and future growth. Initially, consider outsourcing unless there's an expert on your team. Save hiring a CFO for later stages, such as series B, unless you're in the fintech industry.

#5. Ask the Right Questions Before Fundraising

Assess the necessity of fundraising, whether it involves refining an idea or hiring personnel. Define milestones, understand burn rates, and determine the optimal time to initiate fundraising efforts.

#6. Master Forecasting as you Expand

Develop forecasting skills as your product and team grow. Understand key performance indicators (KPIs) that matter to investors, including user metrics, profitability metrics, and headcount metrics.

#7. Establish Valuation and Milestones

Clearly identify goals, assess required resources, and ensure a buffer of 6 months' cash burn to determine your valuation. Apply a 20% cash burn sanity check and consider your business's potential in the market.

#8. Manage your Investor Expectations

Define a clear process for engaging with investors, whether on Sand Hill Road or elsewhere. Be prepared with necessary outputs and information to streamline interactions.

#9. Know Where you are in the Broader Market

Understanding your position in the market is everything. Recognize how investors perceive your startup by staying informed about your position in the broader market. This awareness is crucial for strategic decision-making and attracting investor interest.