Looking to improve cash flow for your innovation business? If you are, then you’re on the money in more ways than one. Without a solid cash flow position, any venture — including an innovation business — will ultimately falter, then fail. Indeed, running out of money is the number one reason Australian businesses have to shut their doors for good.[1]
The current economic storm clouds are making it harder than ever for start-ups, scale-ups and other companies with R&D to keep their cash flow on track. Innovation costs money. Depending on the type of R&D you’re working on, it can be very expensive, for example, if you need to invest in capital equipment to get the job done. So, we’re exploring five tried and tested ways you can use to improve your business cash flow and sustain those all-important R&D programs, whatever your business stage, size or sector.
1. Have a cash flow plan
Having stable cash flow is the foundation any innovation business needs to succeed. Start by getting a clear picture of your company’s cash flow position. A cash flow statement will reveal how much money is flowing in and out of your business. Accounting software platforms such as Xero, QuickBooks and MYOB have in-built calculators to help you produce a cash flow statement. We also recommend running the cash flow numbers and statements you’ve created, past your accountant for checking.
With your cash flow statements in place, you can move forward using your cash flow forecast and plan to keep your venture in tip-top shape. This live document will act as a three-month rolling forecast for your cash flow. It will guide you on when to deploy capital and flag any cash flow shortfalls on the horizon. That way, you can take pre-emptive action and keep growing or scaling your business as smoothly as possible.
2. Prioritise generating income and getting paid
If your start-up is generating revenue, watch your income stream like a hawk. Then, be as ruthless and efficient as a bird of prey when it comes to getting your invoices paid. Issue your invoices on time and in line with your payment terms. Make sure your invoicing includes clear payment deadlines. Use a strong process to issue reminders and chase late payments. These functions are included in accountancy software programs, or you could enlist the services of a debt collection agency if you have clients with sizeable overdue invoices. Whatever you do, don’t make exceptions for late payers. And read the tea leaves. If a client is appearing on your aged receivables list regularly, it could be a sign that they’re in financial difficulty. Don’t hesitate. Take evasive action wherever possible, by collecting what you’re owed and finding a financially stable prospect to replace your wayward client.
Grants and incentives
If your business is early-stage, or sector-specific factors mean your venture is either pre-revenue or you’re generating revenue but no profits, then put grant funding on your income agenda. There are different national and state-based government grants as well as support for specific sectors and categories of founders. There are currently 608 government grants and incentives up for grabs if you have an Australian business. Check out the grant finder program here to boost your income and help your venture transit safely through the Valley of Death.
Business awards and angels
Don’t overlook business awards. While some may have a cash or mentoring prize, they can also help raise the profile of your venture and attract swift support from an Angel Investor aligned with your sector. For more information about Business Angels and how finding the right one can be a relatively speedy way to secure investment income for your business, check out our article, Angel Investor vs Venture Capitalist: which is better?
3. Reduce expenses and manage your outgoings
Go over all your expenses with a fine-tooth comb and cut or reduce them wherever you can. Make sure you’re carrying as little stock as possible and take the time to ensure you’re optimising your inventory. There are many ways to cut your company’s cost base and slow your burn rate. Consider whether a Co-Working Space is more cost-effective than a traditional office lease. Explore if your business is eligible to join a start-up incubator or an accelerator program. Take a look at outsourcing some or all of your R&D to a research service provider (RSP). Using an RSP can deliver the dual benefit that your business accesses top-flight researchers while reducing the staff costs for your innovation.
Then take a look at the payment terms for the essential items you need to buy for your start-up, scale-up or your company’s R&D programs. Reach out to your suppliers and explore whether you can extend your payment terms. If you don’t ask, you don’t get. And having extra weeks to pay or even a few more days could make an outsized, positive impact on your company’s cash flow position.
4. Create a safety net
Having a financial backup plan could save your business and stop you from losing your shirt. So, it’s well worth factoring this in when you’re looking to improve your cash flow, especially if you’re planning to scale up in the not-too-distant future. By having a little cash squirrelled away, you’ll be able to pay suppliers and staff and keep your business going if you hit a road bump that derails your cash flow. Personal savings, retained earnings, or a credit card are options you could use to shore up your venture during the lean times.
5. Find suitable finance
Banking on a well-time capital raise to plug a cash flow gap has always been a risky strategy as reeling in the right backer takes time and is uncertain. With investors getting scarcer and market sentiment barrelling south, you could wind up insolvent before your innovation business secures the investment it needs. So it’s worth exploring your options with debt financing. However, many businesses with innovation, especially those at the pre-revenue stage, can find it nigh on impossible to get business loans from their high street bank. So don’t limit yourself to the traditional financiers. Explore the growing number of financial products specifically tailored to start-ups, scale-ups and businesses doing R&D. These include revenue-based loans, peer-to-peer lenders and R&D financiers.
R&D finance
Interest rates are an important consideration when you take on any loan as these charges determine how much your borrowing will cost. There have been 10 increases in the bank lending rate in Australia since May 2022. Although the Reserve Bank of Australia hit pause on lifting the base rate in April, the central bank foreshadowed more rises in future. Radium Advances, the R&D financing from Radium Capital, have fixed interest rates. So, you have the certainty of knowing exactly how much a Radium Advance will cost before you sign your loan documents.
Cash flow friendly, non-dilutionary and uniquely versatile and scalable, Radium Advances are available to businesses of any stage, size or sector, providing they are eligible to apply for the Federal Government’s R&D Tax Incentive refund. Why not give your cash flow a boost? Book a call with one of our R&D finance experts to find out if you can apply.
[1] CBINSIGHTS (2021) The Top 12 Reasons Startups Fail, [online] available at: https://www.cbinsights.com/research/startup-failure-reasons-top/
*Radium Capital is a specialist R&D financier. The information this article contains is general. It is presented for information purposes only. It does not amount to advice and should not be considered as such. Radium Capital recommends that any business assessing its eligibility for the R&D Tax Incentive (R&DTI) and preparing an R&DTI claim should seek the advice of an R&D Tax Consultant.