10/2/2023
11/4/2024
Startups: stabilize your startup's cash flow with RBF
As a startup, your development depends above all on your ability to finance your projects. Without the ability to financingit is impossible to invest and therefore to grow your company.
Have cash in hand liquidity (cash) is essential. In simple terms, cash is the difference between cash in and cash out, it is real, tangible money that appears either on the assets or liabilities side of your balance sheet. They are used to pay your employees, your suppliers, the rent...
This financing capacity can be obtained in different ways, it is often divided into two categories: the dilutive and the non-dilutive. In this article, we will focus on the RBF, a non-dilutive financing method still little known in France, whereas it is very successful in North America.
How does a startup's cash flow work?
What is cash flow?
A startup, like any company, needs cash flow. This notion is to be differentiated from profitability or growth.
Cash flow is the amount of money available at a given time, while profitability is an accounting concept used to refer to a company that makes enough sales to cover its expenses.
The most telling way to approach the notion of profitability is EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), which is more or less the difference between sales and expenses. It is not because a company is profitable that it has cash available.
The economic management of your startup must be done in the three dimensions: monitoring growth, profitability and cash flow, because one does not in fact lead to the other. These are different concepts that can go hand in hand and complement each other, but each has its own specificities that you must try to optimize.
The lack of cash flow is one of the causes of failure among startups that we have listed in a previous article.
Working capital management
As far as cash flow is concerned, the focus should be on managing supplier and customer payments in order to be sure of having liquidity.
Payment terms are the lifeblood of your business. For example, if you are disbursing faster than you are receiving payments from your customers, you will indeed be profitable, since you are making sales, but you do not have any cash available.
This is why the follow-up of payments must be done on a regular basis in order to avoid unpleasant surprises and in particular defaults in payment without dunning the bad payers. This is part of the billing process. For an optimized process, the logic is that cash receipts should be made as quickly as possible and cash disbursements within a "reasonable" time frame.
In any case, disbursement deadlines are governed by law. It is then a question of anticipating these flows which, in any case, cannot take place more than 60 days after the date of the invoice.
In order to avoid defaults as much as possible , you should evaluate your customers and since payment terms do not have to be equal for all customers, you may choose to set a shorter term for low-risk customers.
Some tips to optimize your cash flow
The golden rule is not to overestimate the volume of sales you will make over a period of time.
If you count on more money coming in than you actually make, that's the best way to end up in the red. This also goes along with keeping a daily eye on your accounts, daily steering allows you to better anticipate future inflows.
In addition, even in times of growth, when you may be tempted to spend lavishly because you have the funds to do so, you must remain prudent. Always keep a reserve that you can dip into during periods when cash flow is not as fast. To manage these flows, we recommend that you hire an accountant.
Finally, don't be afraid to be overly demanding about paying invoices within the deadlines you have set. These deadlines must be respected, otherwise you run the risk of becoming the one who always gets paid last. Without a framework or penalties for late payment, some will abuse the lack of reminders to delay payment.
Dilutive financing for the cash flow of a startup
In simple terms, dilutive financing includes all the means for a third party to invest capital in your company. The financing is qualified as dilutive because it will dilute the shareholding of your startup.
Among the methods of dilutive financing we find:
- Fundraising
In a fundraising, investors receive shares in your startup in exchange for the amount they will invest in your project.
- The business angels (angel investors)
These investors, often present in the early stages of the startup's life, will invest average amounts of €20,000.
- Corporate ventures (private equity)
These are large companies that have the cash to invest in companies in the same industry as theirs.
In order to benefit from these funds, it is important to prepare a pitch of the startup's project, to present the team, the business plan and to do some storytelling to attract investors.
Investments will be granted according to the size of the market, the closeness of thinking between your startup and the targeted investor and finally the potential of the product itself.
Benefits
Dilutive financing has some advantages such as the added value of investors. Whether they are business angels or corporate ventures, they are regulars. They have a certain experience and invest in projects they believe in.
Investors also have an important network from which your startup can benefit from. We're not telling you anything new when we say that the network is a central element in the development of a business.
Finally, investors will be able to provide you with advice. This is especially true with corporate ventures since they work in the same industry as you. They have a precise knowledge of the market, which allows them to have a global vision of the path to take.
Disadvantages
The big downside of dilutive financing is definitely the loss of control. As we mentioned earlier, investors are buying shares in your company, they are not donations or grants but an investment.
Thus, with dilutive financing, yourisk losing control of the decisions even though you are the creator of the startup since you are giving votes to the investors.
Another thing to think about is time. Sometimes you need cash almost immediately and getting dilutive financing takes time. Raising funds is not immediate, convincing investors is not immediate either.
Non-dilutive financing for secure cash flow
Non-dilutive financing
The non-dilutive financingUnlike dilutive financing, non-dilutive financing comes with no loss of power: there is no sale of shares in the company.
If it does not, non-dilutive financing does not replace dilutive financing but can complement it.
For example, when a fund raising is going to be done on the long term, Revenue Based Financing is for the short term. Thus, the two types of financing are considered complementary and not exclusive.
Non-dilutive financing can also be seen as a preparation for dilutive financing: it is a guarantee of good economic health and confidence.
Finally, it plays a "boost" role when your startup is in immediate need of cash: you can invest in non-priority areas but in which you will have to invest one day.
Non-dilutive financing canaccelerate the growth of your startup by providing funds that you would not have had access to until later if you had relied solely on cash flow from sales.
Focus RBF
FBR is a flexible financing option that adapts to your pace of development.
The amount of funding changes as your startup grows. If it experiences periods of growth, the amount it is eligible for is increased. This growth, for example characterized by the hires you may make, can foreshadow future cash flow. The RBF allows you to obtain a cash advance based on this forecast.
The amount of cash you are entitled to is calculated from your WCR, your debt ratio, ... The CLTV (Customer Lifetime Value) will also be taken into account since it allows to anticipate the volume of customers who will come back to you when they have a similar need. Thus, it is revenue that can be anticipated.
Revenue Based Financing with Karmen is a simple and effective solution as all you have to do is fill out an online application. You will receive a response within 48 hours.
It does not require any guarantee except for a minimum income to ensure the solvency of the startup that applies. The RBF is particularly adapted to digital companies, e-commerce and SaaS.
Karmen offers three different products and is the pioneer of Revenue Based Financing in France. The company has just raised €50 million to continue its growth.
The cash flow of a startup should not be neglected because, as we have seen, it is more than necessary to have liquidity in order to grow. Without liquidity, there is no development.
This cash flow can be generated from sales revenue, but in the early stages of your startup's creation, this revenue is often not enough.
By capitalizing on future revenues, including the retention of certain customers who represent anticipated cash inflows, Karmen enables startups to grow faster than they would have if they had not received additional funding.
