A deep dive into startup cash flow management

For startups, cash is king. And managing it efficiently is the top priority for any successful, growing business. So as part of the CFO Connect Summit, we held a session dedicated to the subtle art of managing a company’s cash flow during hypergrowth.

The session included leaders who went from cash-rich tech giants — like Audible, Zalando, and Vodafone — to early-stage startups. They gave us their insights and the key cash management principles they've implemented along the way.

In this article, we share their main insights and recommendations to help finance professionals identify the best practices and tools to enter a hypergrowth phase. And the full session recording is available to watch below.

About the experts

• Dr David Moreira is CFO at Motesque Inc, a company specialized in smart and intelligent motion analysis systems. His 15+ years experience of operating and scaling global high growth technology companies spans SaaS, ecommerce models, omnichannel, and FMCG. He also served as Senior Finance Controller of Group Investments at Zalando in Berlin from 2012 to 2013.

• Niels Boon is CFO at Zenjob, a tech-powered employment agency. He learned a lot about strategy and corporate finance through advisory roles in investment banking at Sequoia and strategy consulting at McKinsey.

• Antoine Visseyras , is a Partner at ACTING Finances and an Investment Advisory Committee Member with LeFonds by FrenchFounders.

Watch: Cash-flow management for hypergrowth startups

Table of contents

• The impact of cash management at various company stages

• Managing cash in a hypergrowth context

• Top KPIs to follow in the context of cash management

• Flexible forecasting: what it takes to grow fast

• Best practices for spending cash during a hypergrowth phase

• Leveraging debt during fundraising stages

• How to arbitrate cash-flow between operation and corporate needs

• Managing cash and board pressure in-between rounds of fundraising

The impact of cash management at various company stages

Both Niels and David spent time at Zalando, a large German clothing seller. When asked for their top priorities in terms of cash management at the company, they paint two very different pictures.

For Niels, ​​”the focus was at first on profitability management, and working capital management or cash management. There was nothing in place, so the main focus was just on growth - getting brand recognition everywhere. And if you pay enough, you can probably get there with a lot of TV campaigns and things like that. So I was focusing first on profitability management, making sure that from an EBITDA perspective we would become more profitable, and then setting the benchmarks and tracking the right KPIs.”

But the focus soon shifted towards working capital management. “We had to set it up from scratch: accounts receivable, payables, inventories, and then go deep in all of those groups to understand our current situation and how we could improve.”

A few years later, with Zalando being listed, David remembers having different priorities: “I was responsible for the planning and orchestration of all cash flow related to fixed and intangible assets. It was really important for us to have strong liquidity, and to be able to invest where the projects and initiatives were paying the highest returns.”

Managing startup cash in a hyper-growth context

Both before and after the IPO, profitability has always been a strong focus for Zalando. But hypergrowth makes it tricky to remain in control of all expenses. For our guests, however, there are ways to manage cash by spending smarter.

For Niels, it’s all about the tools you can choose to facilitate your day to day: “these days, there are a lot of additional tools that were not there in the past. For example, Spendesk, or Agicap, which are really useful.” In his opinion, tech companies need to focus on two big items in terms of spending:

• Marketing (especially online marketing)

• People (especially the hiring process)

“It’s useful to go deep into those two. But at the same time, there's a risk that you know too much because there's too much data available, and also you can kind of drown in the details. So depending on the stage of your company, you need to delegate and let go under a certain level, because otherwise you might go.”

For David, it's all about one of the fundamental decisions that every business has to make. “It goes back to how you choose to allocate the scarce resources and funds for competing uses. It means that companies have to decide where to double down on investments where it's paying the highest returns, first, and secondly how to control it.”

In a nutshell, spending smarter is all about using the right tools, as well as selecting the right area where you allocate your scarce resources, and how you control them afterwards.

Top KPIs to follow in the context of cash management

Selecting the right KPIs to adequately manage one’s cash flow can be a daunting task. However, Niels and David share what they’ve chosen to focus on at Zalando, over the different stages of the online fashion platform.

As David remembers, “back then, we were focused on four main overall KPIs: the top-line revenue (or GMP), the profitability (or net income), the working capital ratio as a percentage of revenue, and the investment level (also as a percentage of revenue).”

When it comes to the cash-flow’s KPIs, David identified three main areas of cash-flow management:

• The operational cash-flows.”At Zalando, where we always try to have close to zero, negative working capital but slightly below zero. That was the best KPI that we thought that would help us to steer efficiently our operational cash-flows.”

• The investment cash-flows. “We were basically looking at two main areas of spending: infrastructure and technology. In regards to infrastructure, the investments were mainly dedicated to large supply chain investments, such as warehouses, robotics,... What was really important was that these investments would serve the business ahead in time, we were always planning one to two years ahead.”

• The financing cash-flow.

On top of that, Niels also brings a great insight to the conversation: “I think it also depends on your stage and business model. One important KPI I would mention is CLV over CAC, so the customer lifetime value compared to the customer acquisition cost.”

Flexible forecasting: what it takes to grow fast

One question young finance professionals often ask themselves is under what timeframe they should approach the subject of forecasting. We asked our guests if they were working on it on a yearly basis, or if they sometimes had to re-forecast, and at what frequency.

As David explains, nothing ever goes according to the plan. "We're in a hypergrowth stage, actively working on the next investment round. So, sometimes we have ups and downs which require an adjustment in our forecasts. To that, we have a yearly top-down and bottom-up approach where we align with the strategic team on the main KPIs that we want to achieve ahead in time, first in one year, two, and three, and then we allocate this budget across the areas. That's how we go about building the initial budget. But as we have so many externalities during the year, we indeed have to re-forecast on a quarterly basis accordingly.”

On top of that, he adds “we always play around with re-forecast scenario planning. We always have the current scenario, the worst-case scenario, and the best-case scenario.” These unforeseen circumstances can indeed threaten or supercharge company growth.

Best practices for spending cash during hypergrowth

Hypergrowth comes with many perks, including the availability of new cash, which can be scarce up to a company’s series B. But this phase also comes with several challenges for finance teams, including managing that new cash.

As Niels testifies, “if you get close to a round and your bank account is full, then of course you need to spend as quickly as you can. It sounds a bit counterintuitive, but you will never reach the budget that you gave to the investors otherwise. So you have to go quick in terms of hiring, typically, and this always takes longer than you think."

"You also have to set up the right processes to make sure that you'll actually be able to hire those people to then reach the targets that you set. You might spill some water over the edge sometimes here and there, but this is how it should be if you want to really scale quickly.”

For him, the most important challenge is “you always keep track of your unit economics, that they’re still good and working well. Because typically when you start spending more, your ratios deteriorate.”

Leveraging debt during fundraising stages

It’s a common practice for finance teams to lever on debt during the fundraising phase. However, is it really desirable to do so for the health of the company?

For Niels, it’s a no-brainer. “This is definitely an interesting option to look at, and not just equity financing. Because in the end equity is the most expensive way of financing, and takes the most time. I think looking at alternative financing like that would be interesting.”

However, he adds a piece of cautious advice for those who might seek out such financing alternatives. “It depends on the stage of the company as well. If you're early stage and you don't have profitability yet, that rules out a lot of potential debt providers.

For a few years though, a couple of new players in the market have started offering specific financing for customer acquisition costs, or online marketing spend for example. So you could finance just these parts, and this would typically be cheaper than equity. I think it's definitely worth considering it.”

More on non-equity financing

• Venture Debt 101: Is It Right for your Business?

• How Startup Business Loans Compare with Venture Capital

• Inventory Financing for Startups: How to Grow with Debt Funding

How to deploy cash flow between operational and corporate needs

According to Niels, what usually happens with tech companies in high-growth situations is a shortage of talent. With that in mind, he recommends doing anything one can to speed the recruitment process up.

As he puts it, “therefore, looking at acquisitions to buy a certain company somewhere would definitely be an interesting option. You might get a headstart by acquiring a team right away. You could also do some kind of tech acquisition, where you buy a product you can integrate with your existing main product.”

However, there’s a downside to this approach: “you can't depend entirely on them, because two thirds of acquisitions turn out to be unsuccessful. So you have to be really sure why you're pursuing a certain acquisition.”

Managing cash and board pressure between fundraising rounds

The relationships a company nurtures with their board of investors can have a drastic impact on the cash management during a hyper-growth stage. There can be significant pressure on the finance team to spend fast and allocate resources properly.

As Niels recalls from encounters with Zalando’s board, it’s a tricky dance, and expectations change fast. As he puts it, “the question always comes. ‘Can you not go faster? Can you not spend more? Can you not just do way more marketing spend?’ But then, if you start spending more, but profitability comes down, at the next board meeting, the exact same people will say the opposite.”

His advice: “it's always good to show where you are investing and why, and what the hypothesis is. As long as you're open about what you're doing and why, and then hopefully the budget and the costs also correspond to that story, you should be good.”

David adds a piece of advice on the best way to manage cash prior to or after a round of fundraising, which may help finance leaders manage their board’s expectations: “today, we have a long-term plan and a short-term management on this plan. We have clearly outlined our promises, in terms of new countries to enter, in terms of new customer acquisitions, in terms of quantity and quality and volume of each customer, as well as the levels of cash that we have to have to execute our budget efficiently.”

Based on that, there are punctual reviews which help follow the plan’s progress: “on a monthly basis, we have reviews with the tech teams, with the management team, with the sales team, we marketing teams, where we review one by one what were their main initiatives. We look at how much was spent against the plan, and if there is an opportunity to spend more. In addition, on a weekly or biweekly basis, we sometimes come back to the cash management and raise a flag if need be.”

Overall, careful financial planning and flexible, timely reviews are the right mix to ensure success for the finance team in a hypergrowth environment!