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Cash flow: the challenge all startups and SMEs face

Posted 1 month ago in Small business by Kevin Fitzgerald

Launching and running a business is no easy feat. Entrepreneurs wear many hats, and some may not have the training or know-how to manage the financial aspect of their ventures. Founders may overlook accounting lapses and problems. This ends up hurting their businesses in the long run.

At Xero, we seek to empower our small business customers with the resources they need to manage their businesses. We often put them in touch with accounting partners who can help them make sense of their numbers and seize opportunities for growth.

In the second episode of Xero On Air, I sat down with Host Graham Brown from Asia Tech Podcast and Junxian Lee, CEO and co-founder of Moovaz, an international tech-driven relocation service company. We discussed common cash flow problems in small businesses, entrepreneurial risk-taking, the benefits of financial visibility, and more. Junxian, also known as Jonah, shared lessons he learned from launching various business ventures.

The problem of cash flow in new businesses

Startups and SMEs have unique challenges, and I know this firsthand. In my former career as an accountant, I helped businesses with finances, bookkeeping, and taxes. These experiences opened my eyes to the fact that plenty of small businesses face the same challenge: cash flow.

Jonah identified personally with this. He launched his first business when he was a university student, and soon discovered that cash was a problem. As he had not yet established a relationship with suppliers, he would often have to pay them up-front and make up the difference later on. This hampered the business’ cash flow—a situation that eventually forced him to close the company.

Today, Jonah is a successful entrepreneur with many ventures under his belt. The lessons he learned from his early projects came in handy, especially that of always ensuring proper cash flow management.

He used those lessons when he co-founded Cashshield, which offers a full-machine automated fraud management solution. But this time, he faced another challenge—that of high margins and long sales cycles. Customers could be a dime a dozen, which meant he had to manage his cash flow for at least six months to a year before securing a client. “Once the client comes in, then it’s high repeat and it’s chunky,” he says.

On top of that, CashShield’s highly sophisticated product meant they had to shoulder heavy research and development costs in the short term.

It took a few years, but Jonah finally got their cash flow management and accounting practices right.

Making sense of business numbers

In managing Moovaz’s finances, Jonah has much more visibility into the numbers of the business compared to his earlier ventures.

He uses his Xero account daily to keep track of his financial health. It gives him a snapshot of where the business stands every day. With Xero, he creates a monthly overview of the business, including earnings, payments, and pending financial matters, using the company’s real-time and historical financial data. This information helps him and the company’s management to make crucial decisions, such as whether or not to redirect resources towards certain activities.

This is a far cry from his earlier experiences. He explained, “We knew we were selling. But we just didn’t know what each dollar that we sell for meant.” The more they scaled, the more they lost. Despite his background in accounting, he was still spending more money than he was making. He had failed to take into account the long-term costs of running a business and how that would affect profit.

It’s a scenario that I understand all too well from my time as an accountant. I’ve seen startup owners making money without accounting for the “slingshot effect” of expenditure and loss. This included settling bills, collecting payments, and other expenses and tedious accounting tasks.

As an accountant, it was my role to take them through their profit and loss. I would help them understand their net profit and what they are left with at the end of the day.

At Xero, we often see this gap in financial understanding among many startups and SMEs. That’s why we connect them with accounting partners who can help them improve their financial literacy. These accountants look out for red flags and work with clients on scenario planning.

Not every entrepreneur has a background in accounting, so business owners would naturally have different approaches to financial management. Reaching out to professionals, such as accountants, can help them make sense of financial position.

Expectations vs. reality

Jonah and I are passionate about numbers and facts. You have to know the facts of your or your client’s business—only then can you make strategic decisions or offer suitable solutions. If the facts don’t line up and you don’t have factual content to help people, you’re not going to be successful.

One of the most interesting things that Jonah shared was that he and his partners undertake ‘sanity checks’. This involves presenting the same hypothetical scenarios and business assumptions to different stakeholders. A partner, for instance, may have one perspective, while an investor might have another. The more accurate forecast tends to lie in the overlap between these different perspectives.

According to Jonah, “to be a responsible business owner, you have to have a hypothesis. And you have to know what this is worth to you and your time.” If the numbers based on the hypothesis suggest that a business model won’t work, you might not want to take action on it.

I believe that the same applies to business decisions, especially those that appear to be simple actions but actually end up costing the company significantly. One example of this, which I’ve often seen, is adding one staff member. Although they factor in the costs and returns of hiring, many startups don’t consider the time they need to invest in training a new person, especially one who might fail to quickly understand the business.

But entrepreneurs sometimes decide to go ahead even if the numbers don’t add up. It’s a risk they’re willing to take as they believe in the mission wholeheartedly. And while such founders generally succeed, it can be heartbreaking when they fail.

The changing landscape of business in Singapore

The business landscape of Singapore has changed a lot in recent years—but so have the people. Jonah compares the city-state to places like China and San Francisco, where people never expect things to stay the same.

With Singapore’s growing startup ecosystem, more investors are coming in. Access to technology has improved efficiency and sped up the pace of development. Mindsets have shifted, and young people no longer view traditional paths, such as linear careers, as avenues for success. Small business owners have the opportunity to be competitive—tech companies like Xero, for example, can exist alongside the big boys of finance in the Central Business District.

Singaporean youth are also ‘cloud natives’. They’re more likely than their older counterparts to build or use cloud-based solutions. And that’s where Xero comes in—helping startups understand the importance of financial management, and giving them the tools to succeed.

 

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