Do I have enough cash in the bank to hire someone?
This simple question has been at the top of my mind for the last few months.
I need exceptional teammates who can help us -
Recruit more people for our clients’ businesses
Market our business
Sell to more companies
Organize and orchestrate our in-person events
Adding additional teammates to the company increases our burn rate (our expenses), so today, I’m going to give you a peek into how I think about our business’s financial health.
Startups fail because they run out of one of two resources -
Cash
Energy
Throughout the first 95 editions of this newsletter, I’ve written a lot about building stamina, validating ideas, sales, go-to-market, and business models.
I’ve failed to write much about cash flow and cash management, which is ironic since this is the most important thing a founder can do - manage cash flow and avoid running out of cash.
This week’s post is about the lifeblood of business - cash.
Default State - Dead or Alive
My first startup, Paintru, raised a small angel and venture capital financing round.
Venture Capital investors look for companies that they believe can scale very rapidly. They invest money into these startups, knowing that most of their portfolios will go bankrupt.
This means that the remaining investments must generate outsized returns that compensate for the investments that fail.
Since venture funds typically have 10 years to return capital to their investors, venture-backed companies must grow extremely quickly.
For a VC-backed startup, rapid growth is critical.
The Operational Implications of Raising Venture Capital
To grow extremely quickly, a venture-backed company will use the cash it raises from investors to fuel growth even at the expense of profitability.
What does this mean?
The ‘default state’ for an unprofitable business is a dead business.
A company that spends more than it collects in cash will inevitably go to zero.
The only exceptions to this rule are the companies that can -
Get profitable before the music stops (and cash hits zero)
Raise additional financing rounds to bring in more investor cash
Meanwhile, a Profitable Company…
The company I run today, The Military Veteran, has not brought on external capital.
This means we’ve had to grow our revenue while controlling our expenses.
A profitable company’s default state is alive.
The Operational Implications of Profitable Growth
A profitable company will collect more cash in a period than it spends.
Growth typically costs money - either we pay additional employees or we spend money on marketing.
It’s not hard to run a profitable business when it’s a small shop - if you have limited expenses, you don’t need to bring in too much cash to be profitable.
As you begin to scale, cashflow management and projections become critically important.
Cashflow management is a complicated topic, and rather than writing a dissertation on it, I’m going to use the remainder of this post to describe how I’ve answered the question, “Do we have enough cash to hire someone?”
The remainder of this post is behind a paywall. Subscribe to Retained Learnings to unlock the rest of the post, which is a simple ‘how to’ guide for growing a finance skillset as a founder. The remainder of the post will cover -
Who is the first finance hire in a business
How to implement basic financial discipline in under an hour
How to create a 13-week cash projection
Longer-term planning, KPIs, and my favorite software tools
Keep reading with a 7-day free trial
Subscribe to Retained Learnings to keep reading this post and get 7 days of free access to the full post archives.