CEO at NewCampus, a modern business school in Asia. Exploring the intersection between the future of work and learning with an Asian twist.
Startups often focus on rapid growth and market disruption. Even if startups need to do something different from the big players when it comes to product development, they should look to glean at least one valuable skill from established businesses and governments: the art of cash management.
Treasury management involves managing cash and investments to ensure not only financial stability but also sustained growth. This seems especially true when capital becomes scarce and clients tighten their purse strings.
My company, for example, serves many hypergrowth scaleups, and it’s fascinating to watch their change in direction. It is no longer just about growth at all costs; they are now developing survival strategies to conquer their respective markets in the long term.
This change in mindset aligns with the concept of cash flow management. It’s not just about amassing wealth, but also intelligently deploying resources to weather storms and thrive in the long term. In this article, I’ll look at how three major players have handled cash management in order to distill valuable lessons for startups.
Singapore
I recently watched a documentary chronicling the life of Lee Kuan Yew, the founding father of Singapore. This documentary highlights Singapore’s extraordinary transformation from a struggling nation to a leading world power within a generation.
A key aspect was the careful management of Singapore’s treasury. During its formative years, Singapore encountered many economic challenges. To secure its financial future, the Singapore government has implemented emphasis is placed on accumulating reserves. These reserves not only served as a financial safety net, but also facilitated investments in critical infrastructure and human capital.
For venture-backed startups, the typical industry pace encourages raising capital every 18 months. However, this pace can often lead to unrealistic growth goals, especially in the face of challenges like a bear market. For my company, the painful but ultimately correct strategy involved focusing more on maximizing profit margins and conserving cash. This approach has not only strengthened our financial position, but also provided us with flexibility and options to explore other sources of capital.
Take a long-term perspective is key for startups. Unlike startups that prioritize immediate growth and short-term goals, focusing on planning for the future can guard against economic turbulence and allow businesses to seize emerging opportunities.
Startups should also consider the importance of diversified investments. While many startups focus on a single revenue stream or a solitary product, Singapore diversified its strategy to mitigate risks. Although it meant moving away from the lure of rapid growth, my company found success by diversifying its customer base, from micro-businesses to larger corporations and government contracts. This change, although less immediately scalable, provided us with a more stable cash flow that strengthened our resilience.
Berkshire Hathaway
In the field of corporate cash management, Berkshire Hathaway, under the leadership of Warren Buffett, shines as an exemplary model. Considered the “Oracle of Omaha,” Buffett’s cash management practices have achieved legendary status.
Berkshire Hathaway offers valuable insights to startups, particularly in the area of disciplined cash management. Even if startups cannot boast of colossal cash reserves of Berkshire Hathaway, they should consider adequate liquidity needed to meet operational needs.
Even if startups do not immediately reach scale and diversity of Berkshire Hathaway investments, they need to think about how a wide range of strategic partnerships, investments or acquisitions can align with their long-term vision. Having a variety of stakes can provide strategic advantages, allowing startups to leverage a broader ecosystem to support their growth and goals.
Adaptability was the watchword. For example, in 2018, we favored partnerships with universities, which offered us stable capital in turbulent times. More recently, our partnerships with larger companies allowed us to launch an educational foundation that demonstrated how diverse alliances can be the cornerstone of building a resilient and vibrant organization.
Johnson & Johnson
Johnson & Johnson’s financial strategies also offer valuable lessons to startups, particularly in the area of effective debt management. Although each company’s debt needs are different, Johnson & Johnson provides a good example of how to balance debt with cash reserves, profits, and other assets.
If your business generates healthy cash flow (ideally neutral or even positive), consider how to strategically take on debt. This approach can serve as a bridge during difficult times, ensuring you can meet your salaries, continue operations, and weather market uncertainties.
My company learned this the hard way during the pandemic, when investor sentiment was uncertain and customers were understandably cautious. This experience highlighted the importance of using financial acumen to steer our ship, ensuring we can continue our mission even in the face of adversity.
Startups need to judiciously assess their borrowing needs, evaluate loan terms, and consider interest rates. Formulating a well-considered debt strategy is essential, as it can provide access to capital while mitigating financial risk.
Applying Cash Management to Startups
In the field of cash management, startups can learn valuable lessons from these titans:
1. Prioritizing liquidity is essential. Startups need to ensure they have sufficient reserves to cover operational expenses and deal with unforeseen challenges. A comprehensive understanding of cash flow dynamics is essential to maintaining financial stability.
2. Diversifying income sources is a prudent strategy. Over-reliance on a single product or customer segment can expose startups to significant risks. By expanding their product offerings or targeting different customer segments, startups can hedge against market volatility. Strategic investments and partnerships aligned with long-term visions are essential.
3. If debt is part of the financing strategy, it must be approached strategically. Understanding the terms, interest rates, and repayment schedules is essential to ensure they align with the startup’s financial goals.
4. Taking a long-term view is essential. While startups often prioritize immediate growth, building reserves and planning for the future can provide stability and allow them to capitalize on opportunities when they present themselves.
In short, effective cash management encompasses risk assessment and mitigation. This involves identifying potential financial risks and developing corresponding strategies focused on a resilient financial foundation.
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