In Financials, Startup Management

Ruth Stevenson, Associate Consultant at Salient Point

My two main interests outside of work are photography (hence I usually illustrate my blogs with a tenuously related photograph) and scuba diving.  Diving is a very safe passtime as long as you stick to some fairly simple rules, and most things that can go wrong underwater are easily dealt with as long as you have air to breathe.

It struck me on a diving trip this weekend that breathing air for divers is very similar to cash for startups…

For a diver, running out of breathing air is pretty bad news for obvious reasons.  Cash is a similarly important commodity for any company in that if you run out, you are in a pretty dire situation.  Divers have a variety of techniques to avoid running out of breathing air, and all of these have comparable techniques in cash planning for small businesses.

 

Plan to have enough…

When I’m diving, I can calculate roughly what air I will need for a planned dive, and make sure I’ve got enough air in my cylinder.  If the cylinder I have can’t hold enough air for the dive, then I need to revise my plan or get a bigger cylinder!

Startups often go through a series of rounds of funding, and it is important that each round raises enough money to get to a significant landmark that will enable more money to be raised.  This is the “safely back on the boat” point.  Estimating cash usage can be complicated however.  It’s fairly easy to predict how much will be spent each month as things like salary and office rental are fairly constant, but predicting how long it will take to build a working product or attract first customers is much harder.  This is where the experience of the team will be vital in making sensible assumptions.

 

Don’t take too much…

In diving one possible solution is to simply take several huge cylinders of air down with me.  That means I’ve got so much I can never run out!  It also means I’m so encumbered with kit that I can’t possibly enjoy the dive, and creates additional hazards if I’m likely to be in enclosed spaces, and more equipment for ropes or lines to get tangled around.  Taking vast quantities of air can also lead to complacency, that can be dangerous itself.  It isn’t really a practical solution.

The equivalent for a startup is looking to raise too much cash too quickly.   It might feel secure to have lots of cash in the bank, but the founders will give away so much equity at a low initial valuation that they significantly reduce what they stand to make from the business in the long term.  Complacency is also a danger in cash-rich startups – it’s tempting to spend the money on any opportunity rather than focussing on the things that really need to be done.

 

Monitor Usage

Once I get in the water for a dive, I monitor the pressure guage on my cylinder regularly.  This ensures not only that I am not about to run out, but also that I’m sticking to the plan and that I’m not losing air unexpectedly through some unseen equipment failure.

Cash monitoring is an equally important function for startups, for exactly the same reason.  Understanding how actual cashflow matches the plan will make future planning exercises easier as well as ensuring that there are no unwelcome surprise calls from the bank to say that you can’t pay your bills.  It is also important to make sure that the cash is being used properly – and that you aren’t losing money through mismangement or even fraud.

 

Use efficiently

If you use less air as you dive, then your cylinder will last longer.  Divers generally use less air if they keep fit, get their buoyancy right, and don’t carry excessive weights (including carrying too much air!).

I think I’ll restrain myself from writing about the obvious analagy with cash here…

 

Always have something in reserve

For most recreational diving, the rule is to always have at least 50 bar in your cylinder when you surface (most cylinders start at a pressure of 230 bar).  This is more than is needed to ensure that you keep water out of the cylinder and breathing regulator, and more than the regulator needs to work.  It is there as a reserve in case anything happens that keeps you underwater for longer than originally intended.  For more advanced diving in difficult conditions, we operate the rule of thirds – a third of your gas is to get to the farthest point of the dive, a third to return, and a third is the reserve.  This is because in more advanced diving, bolting for the surface if you run out of air is not possible – either because you are in an overhead environment (cave, wreck) or because it would cause a serious case of “the bends” (decompression sickness – can cause acute pain, paralysis and even death).

Startups too need to consider what their reserve cash balance needs to be – how much is needed in the bank to ensure that an unexpected bill or expense doesn’t cause you to run out?  If a startup runs out of cash it’s administration will be passed to the receivers (the founders and investors lose control) and the amount of cash reserve needed to avoid this will include salaries for staff notice periods, redundancy payments, payments on office rental payments, tax bills etc.  Only if the company can cover all it’s liabilities with cash is it truly secure.  Here I’m going to recommend the advice of a good accountant or financial director to keep an eye on things!

 

Plan for the unexpected

Small deviations from a dive plan are fairly common, but divers plan for catastrophic events too.  Recreational divers carry a spare breathing regulator and dive with a “buddy” so that if one persons breathing equipment suffers a complete failure, they can switch onto their buddy’s spare regulator.  I’m very fond of breathing, so even for recreational dives I carry a small “pony” cylinder of emergency air with a separate regulator.  Technical divers often carry two complete sets of equipment and multiple air cylinders to ensure they can safely complete the dive in the event of a cylinder developing a major leak or a regulator jamming.

Even in a startup there can be unexpected events, for example few companies will be completely insured for a fire or theft from premises (equipment is replacable but prototypes and work in progress may not be), for litigation from a customer or employee, or for long term illness or even death of a key member of the team.  Risk management can help identify potential problems early, and having some sort of plan for emergencies in advance can make a big difference.  This could involve keeping some cash on one side with no planned use, founders having a cash reserve they could inject if needed (or even a credit card) , or maintaining a close and open relationship with investors so there is the possibility of emergency finance from them if needed.

 

In the worst case…

The worst case scenario for divers is a complete failure of breathing air with no secondary supply or buddy nearby.  At this point, you are going to have to get to the surface to survive, and fast.  We train for “Controlled Emergency Swimming Ascents” and “Buoyant Emergency Ascents” as a last ditch.  These options are likely to result in injury or worse.

For companies who are declared insolvent by their boards or creditors, there is a “life after death” in the hands of the receivers.  In theory the founders and/or investors may be able to refinance the business (either through sales, investment or loans) during this time, but for most companies this is a prelude to being “wound up” and having their assets sold to the highest bidder.  Investors and founders stand to get back little if anything of what they have put in.

 

Plan the Dive, Dive the Plan

“Plan the Dive, Dive the Plan” is the mantra of diving instructors everywhere.

I don’t think “Plan the Cash, Cash the Plan” quite works – maybe “Plan the Spend, Spend to Plan” is better for startup?  I wonder if I can get that mantra to take off…

 

Comments
pingbacks / trackbacks
  • […] On this blog, the most viewed posts was 8 Top Reasons for Hiring a Loser, followed closely by Bitesize: Taking Up References and Five Examples of Tech-Bubble-Think in joint second.  In third place was Finding the Right Sales People – Hunters, Farmers and Explorers.  There seems to a bit of a theme emerging around people and recruitment, which we’ll keep in mind for future blogs!  The blog posts I refer people to most often are Do the problems ever end?, Investors, Magic and Mythical Creatures and Cash is like the air we breathe…. […]

Leave a Comment