Capital is one of the key resources you will need to develop your business. When it comes to growing your business, you need to pay close attention to how and when cash is produced. It is possible to fund growth by improving your operational cash flow, provided you take a disciplined approach and accelerate sources of revenue.

The main sources of cash available to young businesses are the entrepreneur’s own money, investment from business partners, friends and family, and external shareholders such as venture capital funds (VC). Commercial banks are unlikely to offer loans as they require years of operating history and consider young businesses to be too risky. Your first choice should always be to maximise the grant aid which you can access using the EU Horizon 2020 program and similar national programs which support innovative Research & Development.

Equity finance means offering shares to friends, family and professional investors in exchange for money into the business. The magic of equity finance is that you have no personal risk; the disadvantage is that you are giving away a percentage of the final value of the business to other people. There are two main styles of raising equity finance – Bootstrapping and Venture Capital.

Bootstrapping

It is possible to raise cash from your customers and to grow the business purely through revenue –operating in a bootstrap mode. The apparel company Patagonia is a good example of a company that grew without external capital. Funded in 1974, it

To bootstrap your business, it is essential to keep operating costs low. Firstly, look at ways to reduce your direct costs to increase gross margins.  Secondly, review your contract and payment terms to find ways to shorten your cash conversion cycle. The more you can accelerate this cycle, the better. Can you ask for payment or part payment in advance of the work being done or offer discounts for payment in advance? Subscription models or annual memberships like Amazon Prime can also be very successful for start-ups.

Finally, could you charge upfront for set-up costs and membership fees? If you can get your customers to pre-pay, this will significantly improve cash flow and provide funds to grow the business.  Smart ball developer.

 Profitability vs cash flow

When you are bootstrapping, cash flow is much more important than profitability.  Management accounts need to show clearly how the business is producing cash. For many businesses, it makes sense to measure earnings before interest, taxes, depreciation and amortization (EBITDA).

For businesses where EBITDA is not the same as cash, for example software businesses that are required to capitalize research and development expenses or businesses with significant capital expenditures, it makes more sense to use a free cash flow measure.

A good way of telling how well the business will do long-term is to look at the unit economics – what is the financial contribution of an incremental customer – think about the unit economics of each sales person and the contracts they win. This will tell you how quickly you can grow without external capital.

Look for Venture Capital when you have a proven business model

There is no point seeking venture capital (VC) money in the early stages of a business, as any investment would be wasted on inefficient sales and marketing processes. It is much better to wait until you have a proven business model and market opportunity. This is when VC capital can help you to rapidly scale-up.

With bootstrapping, you will worry constantly about the lack of resources but you will feel independent and in control.  You don’t have to decide whether to bootstrap or raise VC finance for ever. It makes sense to start the business by bootstrapping to create your MVP when uncertainty is very high. You can raise VC finance when you have good sales & marketing metrics and need to raise capital to go global.

David Carratt