As we look forward to ringing in 2021, many of us are finding it challenging to plan for our businesses with economic uncertainty still looming. The difficulty of predicting when we might start to see economic recovery and jobs coming back and determining what that means for our business and growth leaves us all wishing we had a crystal ball. 

At Ascent CFO, we have been working with our clients to address the unknown by building out scenarios that plan for a slow economic recovery with flexibility that allows for acceleration should we see recovery happen sooner than forecasted. 

Here are a few tips that you may find helpful as you plan for the coming year of uncertainty: 

1. First and foremost - Know Your Cash Position

The age old saying of “Cash is King” is never more true than in these times of economic uncertainty. 

Developing a detailed and accurate dynamic cash forecast model that appropriately reflects your fluctuations in cash for the next 12 months will give you the visibility you need to know exactly how much you are spending every month and if and when you might run out. 

In times of growth, you may be able to estimate your cash position off your profit and loss (P&L). However, with the year of uncertainty ahead, it is important to go to a more detailed analysis where you plan for delayed payments from customers and large one-time expenses such as annual subscriptions renewals or insurance policy renewals. 

2. Lay Out Scenarios

While we all hope for the best, we should plan for the worst. We recommend working through three scenarios: base case, downside and upside. 

Base Case: With your cash flow model in place, you effectively have the base case scenario built for what your business would likely look like if business is essentially flat for the next 12 months. 

Downside: For a downside scenario, model out a decline in sales. You can look at the past 9 months and assume the same level of fluctuation, or you can be more conservative and model a deeper decline for the next 12 months to give a true worst case scenario where cash declines are more significant year end.

Upside: For an upside scenario, build in a slow, steady recovery and growth by laying out your plans of where you might invest excess funds or increase cash reserves.

3. Adjust and Execute

Now that you have your three scenarios laid out, evaluate where you may need to make adjustments and execute on your plan. 

Does your downside or base case show you running out of cash before the end of the year? What adjustments can you make to the business now to ensure that you can extend your runway and spend money where it counts? 

Here are a few things you may want to consider:

  • If you are venture backed, don’t count on funding this year. While we have seen an uptick in venture rounds closing in recent months, they are taking much longer than expected. Make adjustments to see if you can get through the year without a round of funding.

  • If it is likely you need to make changes and reduce spend to make it through the year, make the changes now. Many of us have already made a lot of very difficult changes to our business and thought of making more is somewhat unfathomable. But, you can’t get that cash back once it has gone out the door. 

  • If you have not done so already, try to renegotiate pricing on your major contracts, rent, or software providers.

  • Is the cash you are spending on marketing and advertising getting the results you are looking for, or should you refine that spend or make reductions to add to your runway? Or if you have the luxury of still being able to spend that money, does it make more sense to invest that money into your product this coming year?

  • Have you been planning on launching a new go-to market or channel partner strategy? Is this something you can accelerate at no or low cost while business is slow so that it is in full swing when recovery does happen? Could this be a strategy to give you the bump you need to get through the year?

It is important to stick to your established plan and manage your cash flow diligently. While it is tempting to accelerate hiring and spend when there appears to be some light at the end of the tunnel, we recommend holding off a little bit longer than you would do in a growth economy (hire slow, fire fast). Be disciplined in your approach and set milestones you must meet before you increase your expenses so you know you can cover yourself through the end of the year. 

Contact Ascent CFO Solutions for help preparing your business for the unknown in 2021. Together, we’ll put you in a position to effectively balance a conservative approach with taking advantage of important opportunities to grow your business.

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About the Author:

Rachel Williams is a Fractional CFO with Ascent CFO Solutions. She has 20 years of experience in finance, operations and strategic leadership roles. Rachel is passionate about working with entrepreneurs and helping early and growth stage companies execute on their vision and build value. Read More