Lori Cashman
In the world of venture capital, we’re always talking about cash. You hear phrases like “cash burn,” “cash runway” and “cash on hand” every day from investors and founders alike.
Despite all this talk about cash, early-stage companies rarely scrutinize their inflows and outflows at a level that can unlock peak efficiency. Why are they missing the boat? Because the concept of working capital is not as widely understood as it should be.
We believe that building a rolling 13-week cash flow forecast (or a longer timeline once you get going) can help you dig deeper into your finances and find hidden cash reserves. We encourage our portfolio companies to do this exercise in good times and in bad and to always practice forecasting in times of uncertainty.
Building a rolling cash flow forecast is the single best tool you can have to understand where your cash is going, identify savings opportunities, capture more cash and defer outflows as much as possible.
It’s like counting calories when you’re on a diet — once you start to pay close attention to empty calories, the little cheats here and there, you can see how they add up. Your company’s cash flow is no different.
Commit to this exercise with your entire management team, and you will all understand just how powerful detailed cash flow is. It can help you understand the fundamental drivers of your business. For the non-finance folks on your team, you can find templates online and YouTube videos to help explain the concept of cash flow.
That said, there are no shortcuts. You must build a forecast first.
Building and leveraging a cash-flow forecast
First, document weekly projected revenue (inflows) and all projected disbursements (outflows). This is a cash-basis forecast, so you need to project cash receipts, which will be based on the terms you have now with your customers.
Remember to adjust for timing. Make sure you account for the customer who is notably slow to pay so your forecast is both realistic and conservative. You can include in these inflows any capital raises that you anticipate in this time period. Again, be realistic.
Be sure to itemize all of your fixed costs (outflows), such as payroll, principal or interest due, rent and insurance. Then, detail your variable payments to suppliers, vendors, IT subscriptions, marketing costs, etc.
Once you have an accurate picture of your current state of affairs, you need to go line by line and ask yourself what can be done to increase inflow and decrease outflow.
Here are some things you can do:
Adjust payment schedules and shipping expenses
Can you lean on your customers to accelerate payments that are coming due, or better yet, change the terms to improve their payment cycle? Is now the time to raise prices or add a fuel surcharge? If you offer free shipping and returns to customers, would that make more sense at a certain sales order level instead?
Unlock free business development opportunities
Can your investors introduce you to key customers based on other companies in their portfolio? What can you do to unlock more business now? If you’re raising capital, can you do a rolling close or segment your close into a first and second close?
Analyze payroll and office space expenses
Interrogate every item on your cash outflow. The biggest cost center tends to be payroll. If you are making cuts, make sure you act decisively with a RIF that is big and deep enough so you don’t need to make multiple layoffs.
If you’re not ready to cut payroll, start with finding less space and cutting lease expenses or, at a minimum, work with your landlord to improve your terms.
Source wisely and mind your inventory
For your raw materials sourcing, explore opportunities with other vendors, push your vendors for a bigger discount or negotiate better payment terms. This applies to every input in your product or service, contract manufacturer terms, packaging materials, shipping discounts and so on.
A year ago, buying a year’s supply of raw material may have seemed like a good idea. But today, it’s important to think about how much cash is tied up in your working capital. Can you rationalize your SKU count? Change your formulation? Every dollar increase in gross margin translates into meaningful cash inflow.
Leverage new tariff waivers
Watch the Biden administration’s Chinese tariff decision closely in the next few weeks. A repeal or temporary pause may require you to file for a tariff waiver to take advantage of it. This move would bolster the gross margins of many early-stage consumer companies that have been burdened disproportionately by these tariffs.
Do your research on costs
Conduct this exercise with respect to your third-party logistics (3PL) providers, travel, commissions and bank charges. Whenever possible, do your homework.
Check with other companies in your network that are of a similar size to see what they are paying their 3PL, for example, so when you make the ask for improved pricing, terms or both, you have more information in your back pocket about their pricing and terms.
This way, you have a response to your 3PL provider if they come back and tell you that other companies your size pay more. Know your facts.
Take advantage of credit lines
If you have an untapped line of credit, draw it down and explore increasing your debt capacity, if possible and prudent, renegotiate interest payments.
Are you paying with a credit card or could you start to? Are you using credit card points wisely?
Use marketing dollars wisely
Another important conversation is around reducing your marketing expenses. Regardless of how far you think you have come with respect to organic acquisition since the iOS14 privacy changes, now is the time to scrutinize your paid acquisition and all marketing expenses.
Challenge your team to develop new strategies for acquisition, referral and retention that minimize cash burn. Once the money is spent, you cannot get it back. A good guiding question to ask is, “Three months from now, if we are out of cash or low on cash, what will we wish we had done now to put us in a better position then?”
We can’t stress this enough: Now is the time to conserve cash. Start with the big cuts, and then whip out your scalpel and dissect every opportunity that allows you to cut costs. Do this weekly and encourage each team member to own the process with you.
This exercise can bring you both tangible and intangible benefits. While it will certainly make your team more mindful of every receipt and disbursement, it can also be a tool to unify and build morale. Your team can collectively own the experience of cash management, which in times like these, can be a valuable tool to buoy your engagement and retention.
It’s a win-win that creates a sustainable competitive advantage: As you free up cash runway, you’re also strengthening your team.
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