Notes about Start-Ups
Here we present some observations and practical suggestions about startups, particularly ones that are bootstrapped or ones that do not have institutional investors who tend to impose certain disciplines.
A typical issue with first-time start-up entrepreneurs is the failure to understand the cash flow cycle of the business. Cash revenues usually trail cash expenses. In most cases, cash expenses start from the beginning. Usually new businesses are not able to obtain credit terms immediately from suppliers. In many instances they use their credit cards to buy materials and services, but their credit card limits are low, in comparison to their business requirements. In most cases, cash revenues ramp up over a period of time until reaching their high-level potentials in a few months or few years, in the best cases. The cash outflow could be higher if there is a need to buy production equipment and computers. The cash revenue realization is sometimes further compounded for the time required to develop a product or service and test it to ensure the commercial quality that will make it sellable.
The cash flow cycle is as follows: (1) out, in short-term expenses, payroll payments to employees, and purchases of equipment; (2) in, after collecting credit sales, 30 to 45 days after shipping the products or delivering the services. The shortfall gap of cash outflow over cash inflow, prevailing in most cases, determines the working capital the business ...