By Kristen Koh Goldstein, HireAthena CEO
Know Your Cash — The Top 5 Things To Get Right
1. Cash is oxygen. Good divers don’t take their eyes off the oxygen level of their tank for too long. According to Sabrina Parsons, CEO of LivePlan, “Two thirds of small businesses that go out of business are actually profitable at the time they go out of business.” They simply just run out of cash. How is this possible?
2. Accounting (profits) versus Bookkeeping (cash). Understand both the importance and difference between accrual accounting (profitability tracking) versus cash accounting (cashflow tracking) aka bookkeeping. You can’t make payroll today with cash you will receive in two months even if the revenue is booked or earned today. So why do we care about accrual accounting? Read on.
3. Don’t let cashflow distort Operating Metrics. Unless we categorize revenue and expenses in the period earned and incurred rather than the period when the cash was received and sent (we’ve all been late paying bills!), your operating metrics such as profit margins and growth rates won’t be accurate. Yes, operating metrics are generated from your financial statements which are pulled from the general ledger (aka “the books”) kept on an accrual (accounting) rather than cash (bookkeeping) basis. Why are operating metrics important? You can’t improve what you don’t measure.
4. Avoid inviting theft. Even if you can’t justify hiring a Controller, recognize the need to put in place basic cash payment controls. Eg: the person setting up the wire transfer (or incurring expenses on the credit card) should not be the person approving the wire transfer (or making the credit card payment). I once joined a startup backed by two Tier 1 VCs as CFO and found that the office manager had bought herself a car with the company credit card. She processed the expense reports, so the founders were in the dark about the monthly payments categorized as Transportation Expense. In another instance, the office manager of a different company (yes, another one backed by Tier 1 VCs) was wiring money to bail her son out of jail. In yet another instance, the office manager bought herself an elective cosmetic surgery procedure to the delight of her husband — turns out plastic surgeons now let you make installment payments on your credit card. You can’t make this stuff up.
5. Timing is everything. Is it possible to hire a Controller or CFO too early? In my opinion, yes. The tangible cost is the premature cash expenditure that is unnecessary. The intangible cost is often much more damaging in that early stage founders find false comfort in complex financial models that don’t make clear first, second, and third order effects. In other words, it’s overkill. When you can’t quickly identify what really moves the needle, it’s easy to mistake precision for accuracy which produces a faulty compass for execution.
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