I’m Profitable but Have No Cash, Help!

January 16, 2024by Dan Saccani

Early in my career, I was lucky enough to experience the rise of the PC in Silicon Valley. I worked for a company called Optimal Communications, a phone company being launched with the likes of The Macintosh. At the time, Kleiner Perkins and IVP had invested, eager to join the PC race. On the finance team, I saw the bank account dwindle firsthand, and panic set in as I realized we weren’t making payroll.

Enter Burt McMurtry, VC legend, Stanford board member, and genuinely good man. He walked in the door and told us that he would make sure our doors stayed open, and he was transferring our payroll for the next two months to get us through. He also told us there hasn’t been a startup to which he hasn’t had to extend this loan. It’s par for the course when you start a company, a lesson I learned firsthand.

The good news? We lived to see another day, year, and decade and ended up with an IPO – another interesting story for another day.

As a Chief Restructuring Officer, I’ve seen startups showing profitability on paper yet grappling with empty bank accounts. This scenario often stems from delayed receivables, hefty operational expenses, initial capital investments, or aggressive scaling. These factors can deplete cash reserves, creating a stark contrast between profitability and actual cash flow.

One of the issues I’ve experienced throughout my career with many startups is that most founders are excellent builders, but when it comes to tightening and managing, it takes a different personality to balance the vision of the founder. The founder’s vision is still one of the greatest assets; however, it’s time for the vision to narrow, focus, and make some adjustments in order to survive.

Communicating with Investors
A lot of startups decide to hide their zone of insolvency from their investors. Remember my story at the beginning? If Burt hadn’t been privy to our financial situation, the conversation would have been very different. Transparency with investors is key. Keep them informed about your financial status. They can provide not only funding but also strategic advice and networking opportunities. They’re not just financiers; they’re partners in your journey and may know the next investor and can help bridge the gap while you’re securing the next round.

The Art of Managing Receivables
Your receivables are your quickest cash source. Accelerate collections by incentivizing early payments, tightening credit terms, and being assertive in follow-ups. Efficient receivable management directly impacts your liquidity.

Inventory Efficiency
For startups with inventory, optimizing this aspect is crucial. Implement lean inventory methods to reduce excess stock, balancing this with meeting customer demands. Efficient inventory management not only bolsters cash flow but also operational effectiveness.

Supplier Negotiations
Negotiating longer payment terms with suppliers can significantly ease cash flow pressures. This strategy delays outflows, affording greater flexibility in cash management.

Cost Rationalization
Critically review and categorize all expenses into A, B, and C groups. ‘A’ should be your indispensable go-to-market tools and personnel, while B and C cover less critical expenses. Slash or minimize B and C expenses to preserve cash.

Exploring Financing Options
Consider short-term financing like lines of credit or invoice factoring. These can offer interim relief but require careful consideration due to associated costs and implications. In many situations, payment plans are your best friend.

 Leveraging Assets
Assess your assets for potential liquidation without derailing long-term goals. Selling non-critical assets can provide quick cash influx. Utilizing a firm like Ravix Group can help liquidate non-critical assets in a flash.

The Role of a CRO
In financial distress, a Chief Restructuring Officer’s expertise in strategic recovery is invaluable. A CRO offers insights and methods for navigating tough financial situations effectively.

Fostering a Culture of Financial Awareness
Promote a culture where every team member understands the value of cash flow. Encourage ideas and practices from your team that contribute to better financial management.

Embracing Change and Adaptability
Be prepared to pivot your business model if necessary. Sometimes, the best way to improve cash flow is to realign your offerings with market demand.

Facing a cash crunch despite being profitable is a common paradox in the startup world. If you’re struggling with this issue, remember, it’s not just about cutting costs; it’s about smart financial management and strategic planning. At Ravix Group, we specialize in helping startups like yours navigate these challenges. Reach out for a consultation with our experienced CROs, and let’s work together to transform your cash flow situation.

Dan Saccani

As the Founder and Executive Director of Ravix Group, an outsourced financial services firm for startups, Dan brings an impressive 35-year track record in the startup and technology sectors. With a focus on venture capital funding, debt financing, and mergers & acquisitions, and startup accounting, he has established a reputable position in the industry. Dan's expertise spans a wide array of sectors including life sciences, software development (saas), semiconductor technology, hardware innovation, clean tech, and the internet industry. In the last two decades alone, Dan has played a pivotal role in consulting with various startups, aiding them in navigating the complexities of financial growth and development. Under Dan's guidance, clients at Ravix Group have successfully raised over $1 billion in venture capital funding and secured $400 million in debt and lease financing. Dan has adeptly managed over $3 billion in mergers & acquisitions, showcasing a deep understanding of the financial landscape and strategic business growth in the tech sector.

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