Why Cashflow Management is Critical in the Tech World

In the ever-evolving landscape of the tech sector, where innovation is the heartbeat of progress, understanding your cashflow or operating cycle is fundamental to sustainable growth. 

Decoding Your Tech Cashflow Cycle

A fundamental aspect of cashflow management in the tech sector is comprehending your cashflow or operating cycle.

This entails understanding the duration between procuring tech resources or services, developing, and launching them, and ultimately generating revenue from tech-savvy clients.

Once you understand these timeframes, you can streamline your operational processes, reduce excess tech inventory, and optimise efficiency. 

Related: Why Cashflow Management is so important for Tech Startups 

Where can I get cash?

• Founders
  Many startups begin by the founders bootstrapping the initial funds required to start seeding the idea.
• Family and friends
  For some the risk of losing family or friends over a failed investment is not an option. For others, it is a relatively simple way to get started. 
• Angel Investors
  These are investors who have significant personal wealth and are interested in investing in startups in return for equity in the business. 
• Venture Capital & Private Equity
  They provide capital in exchange for equity or ownership stakes in the company, usually funding is very expensive for the founder.

What do Investors get in return?

• A stake in your company and a vested interest in your business.
• The ability to benefit from rapid growth and substantial returns that come with this.
• To be on the startup adventure with you.

Other Sources of Funding

Government Grants & Subsidies

R&D Tax Incentives

• Can provide your business with a valuable source of "free cash"
• When you engage in qualified R&D activities, you can often claim tax credits, deductions, or write-offs.
• If your R&D expenses exceed your tax liability you may receive a cash refund for the excess amount.
  

Related: A Checklist for Registering Your R&D Activities 

R&D Lending/Funding

• A financial arrangement where businesses, secure loans, or credit to fund their innovation projects.
• Usually up to 80% of the anticipated R&D refund and cash can usually be drawn down quarterly. 
• Arrangements can vary widely in terms of eligibility criteria, interest rates, repayment terms, and requirements

Related: Navigating the Maze of Government Grants for Aussie Startups

Traditional Business Loans 

• Worth a mention but they can be extremely difficult to obtain as a startup, pre-revenue. 

Crowdfunding & Peer Lending

• These platforms allow individuals and investors to contribute funds to support innovative projects or companies in whom they believe in. They are usually used to source smaller amounts of capital as all forms of crowdfunding is heavily regulated by ASIC.   

Australian Taxation Office (ATO)

• A traditional source of funds for a Tech business, but a dangerous game in today’s world of Directors Penalties and with the ATO applying interest rates exceeding 12% on all outstanding tax liabilities.

Now you have the cash, can you go the distance? 

Supercharge Profits beyond Raw Revenue Metrics 

While increasing sales is the traditional route to bolstering profitability, tech startups must consider the nuances of their financial ecosystem. Greater sales can occasionally strain short-term cashflow, especially when dealing with extended tech development cycles and competitive pricing.    

Trim Your Receivables Time

Revamping or in some cases implementing a credit collection policy is a game-changer for cashflow management. Key measures include meticulously screening tech clients, incentivizing prompt payments, implementing progress payment structures, setting pragmatic credit limits, and promptly following up on outstanding tech accounts. Investigate whether your customers have a faster payment term policy for small businesses.

Extend Your Payment & Trade Terms

Leverage trade credit options whenever viable, while calculating the advantages of early payments to your tech vendors or see if other suppliers will give you more generous terms.

Fortify Tech Finance Facilities

Establishing tech finance or credit facilities can dramatically reduce the administrative burden associated with cashflow management. Attempting to secure cash in the tech industry during times of dire need can be a formidable challenge. 

Therefore, proactively putting these facilities in place during prosperous periods can pay dividends in the long run. However, the cost of finance is increasingly expensive, so required repayments will need to be factored in the cashflow to ensure compliance with the facility can be met. 

Constructing a Cash Flow Forecast

• The apex of effective cashflow management for tech startups lies in crafting a meticulous cashflow forecast.  
• A diligently prepared cashflow forecast will offer early warnings of potential tech funding gaps, identifies the need for additional tech financing, facilitates the preparation of funding requests, identifies potential surpluses ripe for tech investment, and aids in managing tech tax obligations. 
• Given the volatile nature of the tech industry, it's prudent to maintain conservative forecasts, as the repercussions of a tech cash crisis can be severe. 
• By following these guidelines and maintaining unwavering commitment to financial discipline, you can ensure that your tech venture remains agile, robust, and financially sound.
  

Related: Why Managing Cash Flow is Key to Business Success

Establishing a Cash Runway

• Hold a cash runway of at least 3 months.
• The cash runway represents the duration for which a business can continue its operations without running out of funds.  
• It serves as a critical financial gauge, providing a clear picture of the company's financial health and sustainability.  
• It helps to reassure stakeholders, including investors and creditors, that the business is well-prepared for both short-term exigencies and long-term objectives.  

In the dynamic realm of tech finance, mastering the intricacies of your cashflow cycle is the key to longevity and resilience. From decoding the sources of cash, understanding investor expectations, to implementing strategic financial manoeuvres, the journey is multifaceted. Establishing a robust cash runway, backed by meticulous cash flow forecasts, becomes the compass guiding your tech venture through the unpredictable terrains of the industry. As you navigate the challenges with financial acumen, your tech enterprise not only survives but thrives, standing resilient, agile, and poised for sustained success in the tech arena.

Get in touch

At Azure Group, we believe rigorous cash management is essential to business growth. Contact us today if you need help with managing your cash flow. 

Have you Have you noticed our #FridayExpertTips... here's one that relates to Accounting

“Good cashflow forecasting gets more accurate over time: the most important things to do, like most things in life, is to start.”