Cash Management: Start-up vs SME

It costs money, does it not!

Every business requires operating cash in order for it to continue opening doors, more so in a post pandemic environment. Managing liquidity can be the difference between survival, thriving and closing shop.

The ways in which an entity manages cash is largely determined by its core objectives. This fact is what differentiates cash managing strategies available for execution in support of the long term vision of an organization. A striking difference is one that can be seen in how scale-up startups (start-ups) manage (or should manage) their cash in contrast to how a traditional SME does the same job.

Scale-up start-up: Scaling burns money. Growth eats up finances. The key descriptor of start-ups with capacity to scale is their hunger for capturing a significant market inspite of profitability. This translates to unique cash management tactics. In such a business focus is placed on the 'spend rate' and what its cash can achieve (product modification, market penetration etc) in terms of capturing the market.

Traditional SME: Profitability is everything. Managing profit and avoiding losses is the essence of business. In an SME scale is only important to the extend that it defines achieving profitability. Cash, here is directly correlated to profits generated. In most cases the shareholders (owners) depend on the business for their livelihoods.

These differences do not however change the underlying principles of cash management. What changes are the tactics employed to meet the dictates of these principles.

Cash Management Principles

Any founder or treasury function must ask themselves these two questions when it comes to managing cash. Each question probes on aspects that form the governance and tactics used to achieve the cash objectives of the business.

1. Are cash inflows and outflows being managed effectively?

Effective management of inflows and outflows entails that the number of days receipts are outstanding is reduced and the number days payments are outstanding is ethically extended. The more time cash spends within the business the greater the chances of using it productively and this is why automation of the processes involved helps to reduce errors and risks of defaults.

In a start-up an eye is nearly fixated at the bank balance and meeting the requirements of the next capital raising round as inflow and use management tactics are formed. Rarely does a start-up seek to fund its expansion solely from customers, unless it has reached a critical mass of customers and has under utilized internal capacities. The SME grinds down on tactics that allow for strict inflow management since inflows (from customers rather than investors) dictate if the business is in a cash crisis or not. Failure to do so for an SME means getting into usually burdensome cash raising tactics which the owners are commonly not willing to implement unless required for survival.

2. Where is the cash generated by the business going and doing?

Visibility of cash movements is as important as allowing it to spent more productive time within the business. A business must at all times know how much money it has and where it is being deployed. A basic principle but one that distinguishes those that utilize money making every dollar count in reaching business objectives from those that fail to make cash productive - a primary distinguishing factor between businesses that plug operational inefficiencies and those that fund operational inefficiencies.

The SME concerns itself with issues to do with creating rules that enable the cash to be available where it is needed most. This includes maintaining target balances in bank accounts where a specific daily balance is set in specific accounts and any excess are mopped out to main operational account with shortages replenished from the same in addition to cash tracking and authorizing cash usage procedures. While these measures are gold standard even for a start-up, they are not usually the focus. Relentless focus in a start-up is on the governance of usage rather than float management. Knowing that the cash was spent on high value activities that facilitate the achievement of the scale sort for is central for the start-up. This may even be enforced by the agreed upon terms of receiving additional funding.

In conclusion, it is without doubt important for all businesses generally to know how to manage their cash. It is just more critical for start-ups and SMEs since they would not yet have built robust systems and networks that allow for relaxed cash management.