159. Post-Funding Mistakes: Over-Spending & Not Forecasting Cash

VC Minute
The next two post-funding mistakes are over-spending and not forecasting cash. Cash is king!

VC Minute – quick advice to help startup founders fundraise better

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The second thing that I see is Overspending.

It sounds a little silly, but actually it happens a lot. Founders who have been living hand to mouth, bootstrapping their businesses and all of a sudden they wake up and there’s a million dollars in their bank account or a million and a half dollars in the bank account. It’s really easy to stop being frugal.

By the way, frugality is a pretty important trait, no matter how big your company is. And I don’t mean to suggest that after raising money, you shouldn’t spend money on the things you’ve committed to spend it on. And by the way, that might include paying yourself more money. It might include getting a new computer, it might include a handful of things.

But it’s really important not to take all the governors off of the bank account.

The telltale sign that you’re overspending, or at least something that should be blinking red warning lights is, you close the financing and you want to take the team out to dinner. Great. Team should go out to dinner to celebrate. But pick where you go very carefully, right? There’s celebrating at the local restaurant around the corner, and then there’s celebrating at the fancy place downtown or whatever ,you get the metaphor.

The telltale sign that you’re overspending, or at least something that should be blinking red warning lights is, you close the financing and you want to take the team out to dinner. Great. Team should go out to dinner to celebrate. But pick where you go very carefully, right? There’s celebrating at the local restaurant around the corner, and then there’s celebrating at the fancy place downtown or whatever ,you get the metaphor.

That’s a tone setting thing. Yeah, you have enough money for a closing dinner with the team. That’s great. You just raised a million and a half dollars, no reason not to spend a few hundred on dinner. But definitely a reason not to spend a few thousand on dinner.

The third thing, which is kind of related, it’s actually related to both of the, the other two is, you have to get better at forecasting.

Again, when you’re in that hand to mouth moment, you don’t really worry about exhaustive forecasts, like every nickel in and every nickel out is something that’s critical, you’re scrutinizing it.

But once you’re really in more of an investment mode, if you have seven figures in the bank, it’s pretty important to start getting good at doing a rolling cash forecast.

It’s not a P and L, but it’s actually a cash forecast that takes into account working capital. The comings and goings of payables and receivables, and how the balance sheet and the income statement work together in a cash flow statement.

It can be really easy to focus on the income statement. But the reality is cash is king. And when you’re running a small company, how you collect, how you think about bad debt, when you pay your bills, all those things are just as important as driving revenue, whatever revenue that is, whether it’s transactional recurring revenue.

And your number one job as CEO is not to run out of money. So doing a rolling 12 month cash forecast, at least on a monthly basis becomes a pretty essential thing that a lot of CEOs don’t think about when they raise money.

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