What Is The Most Important Thing You Should Know?

illustration of cartoon businessman relaxing with meditation

“You’ve gotta know what your cash position is at all times,” I said to “Kevin” yesterday. “If you don’t know what’s going on with your cash, then you can’t manage your company.”

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Kevin is trying to figure out how much money he should raise in his next round of funding, so he has to know what’s going on with his cash. Kevin’s expecting revenue to double from $10 million to $20 million in the next twelve months. It’s a complicated puzzle.

Literally an hour later, I was speaking with “Greg”. He had recently made a large capital investment that looked to be paying off.

However, cash flow was delayed which made it difficult to decide what to do next. And, Greg believed he had a unique opportunity to build a huge, billion dollar business. Again, the question was how much money should he raise, so he asked me for my opinion.

“I feel like I’m at a huge disadvantage because you really need to understand your cash needs for the next three to five years to determine what to do next. Once you have that piece of the puzzle filled in, it will be clear what to do,” I said.

Two hours later, It was deja vu all over again. I was having the exact same conversation with “Steve” about his cash position. .Are you seeing a trend here?

 

You can’t make long term decisions about your startup if you don’t understand your cash position.

 

Kevin, Greg, and Steve are all at critical junctures in their businesses. If they don’t understand how their cash works with their business, they can’t make good decisions.

For example, Kevin needs to present the options of what the company should do to his board and investors. The good news is the board is happy with the progress Kevin is making.

He knows the investors will likely agree to write a check of $5 million. This would probably cover Kevin’s cash needs to get to cash flow positive if he takes a conservative route.

However, Kevin doesn’t know what his cash needs are if wants to execute his vision faster. It’s not rocket science to figure this out, but Kevin needs his CFO to run a sensitivity analysis so Kevin can present the data and his recommendation logically to the board and his investors.

Greg’s situation is almost identical to Kevin’s. His board is pushing him to be conservative and raise a small amount of capital. However, it’s far from clear that’s the right thing to do.

One of your jobs as CEO is providing the information necessary to make informed decisions. Greg’s CFO had recently left the company, and was just about to hire his replacement.

“It will take a couple months for the new CFO to come up to speed,” Greg complained to me. “I want to move now!”

“I know,” I said. “However, the two months delay is worth the wait. Everyone involved will feel so much better once you have the data.”

 

You can’t make short term decisions either without understanding your cash.

 

Steve’s company is at an earlier stage of development compared to Kevin and Greg. He’s just about to break out and really scale.

The company’s last funding round was an angel round of $750,000. The question Steve has to answer is how many people should he hire, and should he wait to hire some of the staff he needs until after he raises a larger venture funded round.

The only way Steve can figure this out is, again, by understanding what happens to his cash in various scenarios.

 

There are obviously other important things for startup CEOs to know.

 

Let’s list some of them:

  • You need a clear vision for your company
  • You need to be able to recruit great talent
  • You need to be able to sell
  • You need to understand how to build a great company culture. In fact, a Stanford University study showed that a collaborative company culture is best indicator of a successful startup.

However, managing your cash might not be the greatest indicator of a successful startup, but it’s a critical skill that every CEO must master.

 

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