edtech cashflow blog

Navigating Seasonal Cash Flow Challenges: 5 Real Tips for EdTech Founders 

When it comes to navigating cashflow, EdTech companies face a set of unique challenges.

The sector’s natural rhythm, driven by academic budget cycles, creates ups and downs in revenue that don’t always align with when expenses come due.

Given these lumpy or non-existent collections during parts of the year, it can be hard for Founders in this space to keep their business afloat, let alone fuel sustained growth.

“It’s a seasonal business,” said Joel Jacobson, CEO of Defined Learning. “You just have to embrace that and be somewhat conservative, there’s only so much you can do about it.”

“I think a lot of times, when companies lose sight of that fact, that’s when they get themselves in trouble.”

But it’s not all bad news. With proper planning, EdTech Founders can overcome these hurdles and create a thriving business.

Here are some tips to keep in mind:

1. Meticulously Forecast Cashflow

The first thing every EdTech Founder should do is analyze the details of their current customer contracts, expected monthly revenue, and billing timelines, using it as a guide for predicting future cashflow.

Mapping out these numbers against your operating costs is crucial, as it gives you a more accurate picture of your company’s runway.

For example, if you anticipate that only 15% of your forecast comes from Q1, and 10% from Q4, you have to plan for that six-month stretch where you’re not getting much revenue at all.

Part of that planning is considering worst-case scenarios: What expenses would be the first to go if financial strains arise? How might those cuts impact cost structure going forward? What could happen that’s out of my control?

Your ability to answer these questions won’t just help you plan ahead; it’ll also boost investor confidence that you can navigate challenges as they arise.

The key is to stay vigilant, anticipate issues, and be ready to adapt accordingly. Remember, you can’t spend your way out of this reality — it’s strategic planning and foresight that lead to financial resilience.

2. Focus on Minimizing Customer Churn

Effectively managing churn is another important factor for the sustained success of any EdTech company.

Churn, or the loss of customers, not only impacts current revenue but also poses a significant threat to future growth and profitability.

One way to limit churn is by having clearly defined teams dedicated to customer success.

At Defined Learning, these teams are split in two: An implementation team, focused on getting new customers up to speed and comfortable with their products, as well as a renewal team, which is solely focused on expanding business within existing accounts.

“The renewal team concept is new to us, but it’s been extremely effective,” Jacobson said. “While we might be losing some accounts naturally over time, we’re making up for that by expanding the accounts that stayed with us.”

Another common scenario for early-stage startups is a full lifecycle Customer Success team, which partners with Sales for renewals.

Regardless of what method you choose, the key is to pay close attention to your customers’ needs, and make sure that any issues that arise are quickly addressed to reduce any controllable churn.

3. Change How Expenses Go Out

Another way for EdTech Founders to manage their cashflow is by aligning the pay out of expenses with collections, shrinking the gap between when revenue comes in and when payments to vendors, and possibly even employees, goes out.

First, look at all of your vendor contracts. Document the various amounts and when they come due. As your renewal date approaches, re-negotiate the contracts so that payments align with your higher collections season.

This could mean signing an 18-month deal versus a 12-month, or paying more upfront, whatever gives you leverage to decrease your overall cost per month on the contract.

The same philosophy applies to new contracts. When adding a vendor, align payment dates and renewals with your seasonal collections.

Understandably, this can be hard if you decide in January that you need to replace a vendor, but that’s where proper planning and foresight come into play. If possible, strike a deal that allows you to make an initial payment up front, with the remainder coming due closer to your collections cycle.

On the employee front, you’ll also need to set your review cycles, compensation evaluation, and annual bonuses to occur after the bulk of your payments have been collected. That way, when it comes time to reward employees for their hard work, you’ll have ample cash on hand to give them what they’ve earned.

In the end, it’s all about leveraging what you control; you have to align the outgoing with the incoming whenever possible.

4. Change How Collections Come In

To enhance revenue stability, EdTech companies can offer a better deal if a customer agrees to sign a contract during the offseason.

“What we have started to do is, when we get to February or March, we’ll give [customers] an incentive,” Jacobson explained. “So, if they sign up then, they’ll get a 15-month license versus a 12-month license, for example.”

Another strategy is to take advantage of multi-year deals to get paid up front.

Jacobson explained that since many of his larger customers can spend a certain amount of their budget without board approval, Defined Learning will ask for a down payment at the beginning of the fiscal year – less than or equal to that amount – and then collect the remainder of the balance later in the season, once the board has the opportunity to officially sign off.

“That’s something that’s worked a little bit so far,” he said. “But conceptually, I think it’s a really great opportunity.”

A third option is to identify aspects of your product that extend beyond the education market, expanding towards new customers whose billing isn’t as cyclical.

For example, an education company that provides college counseling advice to students could potentially expand to provide career counseling advice for adults.

This approach not only helps smooth out revenue fluctuations, but also positions the product to serve more varied markets, which can lead to a more consistent financial outlook.

Before you decide to expand, however; it’s important to first talk to your potential customer base, in order to get a sense of the logistics, as well as what kind of demand exists in these new markets.

If the demand isn’t there, or if the logistics don’t make sense, then you run the risk of spreading yourself too thin, which will only make your cashflow challenges that much more pressing.

5. Use Outside Capital When Needed

There are many times as a Founder where you want to take advantage of an opportunity for growth – the opportunity to attend certain conferences, or expand into a new state – but you don’t have enough bodies on hand to take advantage of the market opportunities, and your bank account isn’t flush enough to hire more.

This is where having a source of outside funding – be it a bank, VC, or alternative capital provider – can come in handy, someone who will offer you a committed facility that will let you say “yes” to growth opportunities, even when cash reserves are lean.

And while VC can involve a lengthy process and traditional loans can involve a certain amount of personal risk, alternative capital can offer a quicker solution without the need for collateral.

“For us, Novel has been super helpful,” Jacobson said. “It’s established a level of security for me personally. I know we’re in good shape, and I don’t have to give up equity in the business.

“I’d much rather draw on the deal I have with Novel, than give up equity. That’s really where I’ve turned the last couple of years.”

And as we mentioned earlier, if your financials are organized, capital providers – like us – will be much more amicable to lending a hand.

By demonstrating, based on past performance, that you have a history of growing while managing burn, you significantly enhance your credibility, and thus your chances you’ll get the bridge you need to navigate the gap between your cash reserves and upcoming billing cycles.

Plan Accordingly, Things Will Work Out

We get it. As an EdTech Founder, you can encounter some unique challenges, and the hurdle of lumpy or non-existent collections can seem daunting at times.

Thankfully, there’s a silver lining: With a disciplined approach to capital strategy, you can surmount these obstacles and cultivate a thriving business in the process.

“I’d say just plan accordingly,” Jacobson concluded. “Be somewhat conservative on your forecasting, and things will work out.”

Be sure to check out Joel Jacobson and the rest of the team over at Defined Learning. They provide K-12 educators with the curriculum resources they need to engage learners in deeper learning opportunities that build future-ready skills.

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