A tactical guide to managing tight cash flow
One of the hardest experiences of being a CEO was managing those time periods when cash was really tight. Many CEOs face this situation during fundraising so it is not unique, but I suspect even more CEOs are facing this now. Talking about ‘stretching cash’ is easy but actually doing it is pretty hard! Over the years, I’ve spoken to several CEOs who are stretching their cash in hopes that a financing or a sale will close and I decided to write down some of the tips I’ve shared with them over the years.
Immediate steps - first, when you’re in a cash tight position, you need to make some trade offs.
Immediately, you should consider whether you need to make dramatic changes to your cost base. In my experience, it is faster to cut costs than it is to increase margins or cash collections. This would include personnel cost as well as other fixed/variable costs (if you need to consider a layoff, check out my article on how to conduct a layoff).
Next, you should determine what your payroll expenses are inclusive of any applicable payroll taxes. In California (and likely other states), management can be held personally responsible for failure to pay employees for past work. So make sure you either have cash available to fund your current pay period or have extremely high likelihood that your cash inflows will cover payroll. You should start to think of your cash balance with at least a minimum threshold of 1 payroll and aim to never go below this number.
Additionally, you will want to think in terms of how many payrolls you can fund with cash on hand - this is your maximum runway and gives you a sense for how long you have to close a deal before running out of cash.
Short term - in the short term, you need to develop projections that give you strong control on how you spend remaining cash and allow you to extend runway as much as practical. Your A/R (accounts receivable) and A/P (accounts payable) are two of your biggest levers in extending runway.
Communicate with your team - It’s important to keep your team aware of the situation. At worst, some team members will leave because of the uncertainty in the business but failing to make payroll with no notice is a terrible outcome that should be avoided.
Determine what’s critical for your business and focus on that first. This includes determining which bills you will pay and how you will prioritize vendors / aging A/P. Aligning on this prioritization will help maintain objectivity to the coming process.
Develop a 8-12 week cash flow projection that outlines cash in and cash out by week on a rolling 8-12 week basis. This includes which vendors you will pay (when your company credit card bills are due, and when payroll needs to be funded. Having a precise forecast will not only help you manage the situation but it will inspire confidence that the company can extend runway enough to close a financing transaction.
Get into a weekly meeting of reviewing / approving cash out with the key stakeholders (finance and the key people involved in vendor management). In this meeting, your team is effectively finalizing the weekly projection, actualizing the forecast so it can be rolled forward, and making any last minute changes. In addition, you will want a similar process to track and manage your A/R. For customers who have not paid, you may need to task your team with reminders and making sure the incoming cash stays on plan.
If you have lenders (venture debt), it’s possible you are already on their radar and have begun active communications with them. Your cash flow forecast will help give them the confidence to continue supporting the company. In an ideal world, you can avoid being put into a “work out” group but even if not, just remember that lender’s best outcome is that the company survives and makes good on its loan. Lenders don’t want the keys to your company and can actually be helpful in finding alternate options for the company or putting pressure on investors to step up their commitments.
Keep your investors / board in the loop. You might consider sharing your weekly cash forecast with your investors. Most of all, you should agree on a minimum cash balance for which you will never dip below - this should include at least 1 full payroll and and shut down costs.
Long term - the company ended up into this position for a reason and its important to start solving the underlying issues related to managing cash. The pain of going through this process usually encourages most CEOs to increase their focus on cash flow.
Solve for your cash cycle - start by understanding your cash cycle, how long does it take you to collect cash vs. pay outstanding bills? Does the company have a negative working capital cycle? Consider beginning a stream of work dedicated to improving your cash cycle by improving collections, re-negotiating A/P terms, etc.
Increase gross profit - while it’s far too easy to say “just increase revenue!,” many companies do find that increasing pricing can be a very effective tool to reducing their burn. Whether it comes from increased pricing, bundling products together, or something else - improving top line with an eye to improved margins is an important part of the equation.
Reduce expenses - outside of expenses that may have been cut immediately, you might consider a process of quantifying the company’s largest expenses and assigning owners to determine 1) whether the expense is justified 2) if there are ways to reduce the cash flow impact of those expenses (which may contemplate trying to pay services with equity or switch from annual to monthly payments to smooth the cash outflow). Recurring expenses should take the priority here because over the long run, any savings on these will compound.
Increase terms - if there are vendors who will consider longer payment terms, you should consider the impact this could have. Increasing your payment terms can allow you to collect more cash from customers and reduce your working capital needs.
Push for payment plans - if you have aged A/P that is size-able, considering asking for a payment plan. Many vendors are willing to agree to this (some payment is better than the risk of no payment) and if you comply with the payment plan, you can rebuild trust with these vendors.
Don’t get too low - as mentioned, employees are your #1 priority. Payroll takes priority over any other company obligation so make sure you continue to watch your cash balance. Also, now is not the time to skip an insurance premium - your general liability insurance and EPL/D&O insurance could end up being critical if the company shuts down.
Consider your plan B and when to call the next play - most CEOs will be thinking of plans A-Z already. As the company gets closer to cash out, some investors (prospective or current) may bail and so having backup plans is critically important. Considering paths you may have discounted in the past (unique funding sources, new distribution channels, changes to your pricing / collections process) could give you the time needed to close a deal.
In the event that you need to shut down the company, hire outside help to take the company through the appropriate liquidation channel and manage the paperwork during and post shut down.
These experiences can take a psychological toll on any CEO. It helped me to remember that one way or the other, there was a light at the end of the tunnel. While I felt the weight of the world on my shoulders, I knew that it would be over soon and that gave me much needed relief.
If you’re dealing with tight cash flow and would like a sounding board, don’t hesitate to drop me a line (gautam at m13.co).