FP Blog: How cash-flow creativity helped Filemobile survive past five years

posted by stevefm on 07.02.12

Tech startups need to be creative to keep the cash flowing through the development phase.

January 23rd, 2012 - Toronto - Republished in part from the Financial Post.

The wise financier who long ago declared that cash flow is key to the successful operation of a small- to medium-sized business, probably had a tech startup in mind. That’s because no matter how small, tech firms tend to burn cash at a rapid rate.

As we discussed in our last entry, it doesn’t necessarily take millions to found a tech company, but it does take significant capital — and a steady stream of cash — to account for costs related to product development, market research, wages, marketing and so on, all of which tend to grow exponentially over time.

It also takes an awareness of which key financial metrics need monitoring. As we quickly learned as young entrepreneurs, anyone who founds a tech firm without a familiarity of the intricacies of working capital is in for a big surprise.

Companies can have assets and be profitable, but can be precariously short on liquidity if their assets can’t be readily converted into cash. Positive working capital ensures there are sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. Tightly managing that working capital means staying on top of accounts receivable (collecting payment from clients, for example) and negotiating better terms on accounts payable.

Why? Suppliers love to receive their money quickly and monthly costs for must-haves such as office rent and data or web hosting facilities put a constant strain on a company’s cash flow. If a firm is providing financing to its clients and not invoicing until the work is done, they’ll quickly understand that the time between paying out and collecting money can leave them insolvent. This is often referred to as the cash conversion cycle and is a critical metric that we learned to monitor early on.

Keeping the taps flowing through a few creative business manoeuvres, some management-level sacrifices and a sound understanding of market needs also helped Filemobile survive past the critical five-year mark. In our case, we even managed the feat without sacrificing equity to outside investors.

How? We incubated Filemobile’s research and development initiatives through people who had other paying jobs. We also had an existing online fantasy sports business that at the time was profitable and generating significant revenue. We then leveraged software developers from that business to design Filemobile’s proprietary social media software platform, Media Factory, at little or no cost to our new firm. Without that financial foundation — which otherwise would have required us to seek alternative financing such as venture capital or angel investment — there’s almost no way we would have survived.

To read the full article go to Financial Post.com.

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