Managing cash flow: Key challenges faced by CFOs and finance teams in startups
As a startup, one of the biggest challenges for a finance team is limited resources. Compared to larger, established companies, startups often have to make do with fewer financial resources, making it difficult for the finance team to handle all of the necessary tasks and responsibilities.
But what do limited resources mean, and what are some of the other challenges Finance teams and CFOs may face in Startups?
Let's break it down into sections to understand how deep the rabbit hole is.
Limited resources
Startups often have limited resources and may have different financial resources than larger established companies. As a result, this can make it difficult for the finance team to handle all of the necessary financial tasks and responsibilities. Many reasons create a challenging environment for the CFO and their team, but four common reasons stand out.
Rapid growth: Rapid growth can be both a blessing and a curse for startups. While it is a sign of success, it can also create new financial challenges as the company scales. The finance team may need to quickly adapt to new business models, products, and customer bases, which can be overwhelming.
Limited history: Startups may need more financial history, making it difficult to predict future performance and make informed financial decisions.
Lack of established systems and processes: As a young company, a startup may need to establish systems and processes for financial reporting, budgeting, and forecasting. The finance team may need to build these systems from scratch, which can be time-consuming and challenging.
Managing risk: All businesses, but particularly startups, face risks that can impact their financial performance. The finance team may need to help the company identify and mitigate these risks to ensure the company's long-term financial stability.
The Big Elephant in the room....Cash Flow Management.
Although limited resources are a big challenge every startup faces, a more pressing challenge is cash flow management.
As a CFO, one of the main challenges is keeping cash flow positive. This involves managing expenses, forecasting, managing debt, maximizing revenue, and managing cash balances. Accurate forecasting is particularly important, as it allows the CFO to anticipate and plan for changes in cash flow. But this is easier said than done. CFOs normally face many challenges that often set them and their startup back, especially when managing everything with spreadsheets, email communications, and a lack of structure in general.
Some challenges that CFOs may face in keeping cash flow positive include the following:
Managing expenses: CFOs must ensure that expenses are properly managed and controlled to keep the cash flow positive. This may involve implementing cost-cutting measures or finding ways to increase efficiency.
Forecasting: Accurate forecasting is critical for CFOs to anticipate and plan for changes in cash flow. This may involve using financial models and data analysis to predict future cash inflows and outflows.
Managing debt: CFOs need to carefully manage the company's debt to ensure that it does not become a burden on cash flow. This may involve negotiating with lenders to secure favorable terms or restructuring debt as needed.
Maximizing revenue: CFOs must work with other departments to identify opportunities to increase revenue and improve cash flow. This may involve identifying new revenue streams or increasing sales and pricing.
Managing cash balances: CFOs need to manage the company's cash balances to ensure sufficient cash to meet short-term needs while maximizing the return on excess cash.
If you don't have a Cross Functional Expensing system (I will discuss it in the next section), you can do a few things to stop your cash flow from crumbling.
Create a budget and track your expenses carefully: This will help you understand where your money is going and identify areas where you can cut costs.
Invoice promptly and follow up on unpaid invoices: Ensure you are invoicing your customers promptly and following up on unpaid invoices. Consider offering early payment discounts to encourage your customers to pay on time.
Monitor your accounts receivable: Keep track of how long your customers take to pay. Consider offering them financing or a payment plan if they have difficulty paying.
Manage your inventory carefully: Overstocking can tie up your cash, while understocking can lead to lost sales. Find the right balance and use just-in-time inventory management techniques to minimize inventory holding costs.
Consider alternative financing options: If you need additional funding to support your business, consider options such as small business loans, venture capital, or crowdfunding.
Don't be afraid to negotiate: If you are having trouble paying your bills on time, don't be afraid to reach out to your suppliers and negotiate a payment plan. It's better to be upfront about your financial situation than risk damaging your supplier relationship.
Effective financial management is key to the success of any business and requires a combination of skill, experience, and proactive problem-solving, which leads me to my next point, Cross-Functional-Expensing.
What is cross-functional expensing?
Cross-functional expensing refers to employees from different departments or functions within a company incurring and reporting expenses related to their work. This can include expenses such as travel, entertainment, team budgets, HR expenses, bonuses, salary raises, commissions, and business meals, to name a few.
Cross-functional expensing can present challenges for startups in terms of tracking and approving these expenses. For example, an employee from the sales department may incur expenses related to a client visit that is also relevant to the marketing department. In this case, there may be a need for coordination between the two departments in order to track and report the expenses properly.
Effective cross-functional expensing requires clear policies and guidelines to ensure that all employees understand acceptable expenses and how to report them properly. It may also require specialized expense management software to help track and manage expenses across departments and functions, which is why we built Bursement to begin with :).
If you're interested in diving deeper, I wrote a long article about Cross-functional-expensing a while back.
If you're not operating in a cross-functional expensing ecosystem, you're risking major challenges that can bite you later on when your startup grows. In other words, you're opening the door to some major challenges:
Lack of visibility: Without a cross-functional-expensing system, it can be difficult for companies to track and monitor employee expenses. This lack of visibility can lead to overspending and potential fraud.
Manual processes: Manual expense processes, such as using paper receipts and spreadsheets, can be time-consuming and error-prone. This can lead to delays in reimbursement and potentially inaccurate expense reports.
Lack of standardization: Without clear guidelines and policies, employees may not understand acceptable expenses and how to report them properly. This can lead to confusion and potentially inappropriate expenses being submitted.
Fraud prevention: Companies need to have controls to prevent fraudulent activity, such as employees submitting false or inflated expense reports.
Complexity of expense types: Different types of expenses, such as travel, entertainment, and business meals, may have different rules and regulations that need to be followed. This can make it challenging for startups to track and manage expenses properly.
Data management: Managing a large volume of expense data and ensuring its accuracy can be challenging for startups. This may involve organizing receipts, tracking exchange rates for international expenses, and ensuring that all expenses are properly coded for accounting purposes.
Cash flow management: Making sure all this data goes directly into your cash flow in the fastest and most efficient way. If you need a spreadsheet to move your expense operations data from another SaaS tool (e,g., payroll tool, bank cards tool, etc.), then you are already at a big disadvantage.
In conclusion:
CFOs and Finance teams are the pumping heart of any Startup. They face many challenges that can seriously derail cash flow operations and thus require extra tools and processes to ensure they are always one step ahead.
Ideally, you want one tool to help create a cross-functional-expensing environment linked to your cash flow (instead of manually plugging numbers into a spreadsheet every month). Some startups end up connecting 2-3 tools to achieve it, but in the end, you still end up updating one mega spreadsheet. It takes time and can open the door to errors.
But the good news is that you have options, so don't fret. When we built Bursement, this is what we had in mind...YOU!