Fundraising? Maybe Not Now. Build Your Positive Cash Flow Story Instead.

Many founders just assume without hesitation that they need to raise capital and they need to do so from certain types of investors (angels, VC’s, family offices, alternative lenders, etc). Although this is the case for many companies that require more internal development before generating revenue, there are other business models, particularly those that produce physical products, that have the potential to bootstrap for longer to the point where raising capital becomes a “nice to” instead of a “have to.” Examples include Dell, Patagonia, Tuft & Needle and Wayfair. When this happens, fundraising becomes a process controlled by the founders versus investors and presents the opportunity to optimize capital structure early on, which makes the business even more attractive for future sale or investment. This also allows companies to tell a positive cash flow story that sets them apart from others when they do end up speaking to investors and to help potentially avoid the constant fundraising treadmill all together.

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Before convincing yourself you have to raise capital now (or while you are trying), try to incorporate a few of these, often overlooked, tips from Ember’s own portfolio as well as companies that have said “No” to us because they didn’t need the cash. Much of this activity happens in the background and may seem trivial and tedious, but the processes have proven to reveal cash flow opportunities that have helped companies avoid having to raise additional money or even saved them from insolvency.

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Meticulous Cash Flow Planning

Goal: Have a clear picture of your cash position everyday

• Build a version of the monthly cash flow model that outlines the minimum amount of cash needed to achieve growth and break-even cash flow.
• Add a 16 week cash flow that shows the cash movements in (revenue) and out (payroll, vendors, taxes, etc.). Be as precise as possible and review and adjust weekly.
• Identify opportunities to improve cash flow. Examples include:
• Receivables collection
• Better payment terms from vendors
• Pre-sales
• Crowd-funding

Negotiate Hard

Goal: Get paid before paying

• Reach out to all vendors to negotiate better payment terms and potential discounts. It helps to outline the future plans for the business and show them how they will grow as you grow. Don’t be afraid to ask for more. For example, try to ask for 120 day payment terms from manufacturers.
• With the uncertainty in the economy, now is an ideal time to negotiate and form deeper relationships with trusted vendors.
• Find other vendors that might offer you better terms to provide leverage and optionality.
• For wholesale customers, ask to be paid upon shipment.
• You can offer exclusives, co-marketing or other incentives.
• Find retailers that offer upfront payment. They exist, including certain department stores that offer it for new brands.

Find Potential Working Capital Partners Just In Case

Goal: Have cash available when needed and generate a return on every dollar

• Establish relationships with financing sourcing to be ready
• Run scenarios where you opportunistically take in additional working capital to see if it can increase cash flow down the road (ex., purchase additional inventory to generate more revenue)
• Short-term financing, new forms of credit, including factors, purchase order financing, alternative banks, etc. may be available to you (ex., JOOR Pay, Rho, Shopify Capital , etc).

An Illustration

Below is the cash position of two different companies with the same revenue and expense dollars over 9 months:??

• Starting cash: $100K
• Revenue: $500K
• Orders place for inventory: $350K
• Marketing Expenses: $135K

The only difference is the terms offered by suppliers:

• Company with Terms: 60 days to pay vendors.
• Company with No Terms: 50% upfront and 50% upon delivery:?

The?Company with Terms has $200K of more cash at the end of nine months?vs. the Company with no Terms!?So, we advise many of our companies to simplify their focus:?optimize unit economics, manage marketing spend carefully and create a proactive cash flow strategy as long as possible by accounting for the timing of payments.