Cash Flow in a Growing Tech Business

RSM and NatWest hosted a TMT Sector Lunch on Friday 15^th July at the Entrepreneurial Spark offices in Brighton to allow local business representatives to discuss issues they’re facing and how best we can overcome them

On the rise since 2010, the Technology Media & Telecoms (TMT) sector is taking off in the UK. Encouraged by local and national government initiatives and backed by some of the biggest global tech firms and learning institutions, the goal is to make Britain the go-to place for tech start-ups. In July, RSM and NatWest co-hosted a lunch, bringing together some of the major players in the TMT sector in Sussex to discuss how we can move forward together to improve the world of tech start-ups.

Representatives from companies such as Madgex Ltd, DMH Stallard, Track Digital, Creative Pod and City & Guilds Kineo Ltd attended and started by sharing some of their biggest issues within their sector. Each delegate was asked to bring with them a question or statement which would initiate a discussion and take the edge off the – sometimes awkward – first 5 minutes of getting to know one another. Whilst the points brought by each delegate sparked some quite heated debate on topics including data security, changing working habits to retain good teams and, perhaps most intensely, data storage, one point which was almost conspicuous by its absence was how best to turn excellent products into cash.

Mark Crowter, Manager at
RSM UK Audit LLP shared his experience with SBT on the topic of cashflow – some of the issues we face and how we can overcome them:

In recent memory there has been a rapid change in consumer expectations. Being able to fulfil these expectations has dramatically reshaped demand and has been driven largely from developments within the tech sector. There is now a far greater focus on businesses delivering their offering in a way which works for the consumer; the rise of Uber and Deliveroo show that changes in delivery do lead and shape the marketplace.

The mind tends to be drawn to what makes the sector unique and differentiates it from others. This is why, whilst scrolling through the wide range of opinion pieces, blogs and articles focused on issues facing the tech sector you are likely to encounter pieces which deal with the tech landscape but which pay less attention to the underlying business. The assumption is that if you get the product right the success of the business will follow. Having seen profitable businesses based on great concepts fail, I know that this isn’t always the case and that the fundamental rule of business impacts the tech sector as much as any other – if you fail to manage your cash flow, your business will fail.

The changes in delivery makes this more complex and, in a rapidly changing landscape, how do you plan or attempt to predict the impact this will have on your business?

The key to managing cash flows remain the same, the change in landscape doesn’t mean that the principles necessarily change; rather it’s a case of having to be more versatile in your thinking whilst remaining focused on the following fundamentals that have always underpinned managing the limited resources of a developing business.

Early stage investment

For any early stage technology company, raising cash to get the business off the ground is probably the most important consideration. Knowing where to find that cash and from who is one of the most common questions we are asked. And there as so many sources depending on the stage a business is at, be it friends & family, angels, venture capital, private equity and IPOs (source: on the heels of unicorns). There is always grant funding and bank loans too.”

“How much cash to ask for is fundamental – ask for too much and you end up giving away too much of the business at the outset, ask for too little and you face running out before you get to a critical stage. Being able to demonstrate this through the business model provided to potential investors will make sure there is a clear understanding how and when the business will spend ‘their’ cash, be it on product development, sale and marketing or other costs.

Profit versus cash flow

The old adage ‘cash is king’ is as applicable in tech business today as in any other. And importantly, the two should not be mixed, up – profit is different to cash.

When scoping a potential customer or thinking about the cost to bring the product to market focusing exclusively on profitability can sink the business! Yes, it’s important to provide a return but if the business runs out of cash the project will in the best case stall and in the worst case fail.

By thinking about the timings of cash flows using a month by month cash flow projection businesses are able to negotiate terms with customers that work for them – whilst something may have to be offered in return for prompt or staged payments, by understanding profit margins and cash flow needs, businesses can find the ‘sweet spot’ that delivers both a good return and provides cash ahead of it being spent.

Building good habits for the business and its customers

The growth of automated billing means that being prompt when raising invoices is much less of an issue – the whole grubby topic of requesting to be paid is out of a business’s hands.

This does not mean that this aspect of the business shouldn’t be a central concern. Understandably credit control is no one’s favourite job but by being disciplined on when and how this process is undertaken can be a really powerful tool in managing cash. By being open and clear with customers on when payment is expected planning on how to finish this project or fund the next is made a whole lot easier.

 

Get in touch with Mark Crowter or Richard Heap, Audit Partner with RSM, with a specialism in Technology, Media & Telecoms (TMT) for more information.

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