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Cash Flow Planning Can Make or Break Your Business

Written by Ascent CFO on August 30, 2021. Posted in Blog.

Whether you operate a mature, consistently profitable business or a loss-generating startup, cash flow is the oxygen of your business operations. Even for companies generating positive net income, poor cash flow management consistently ranks as a leading cause of business failure. If you only have the bandwidth as a CEO to focus on one financial metric, tracking and understanding cash flow can help you avoid failure and is essential to sustainably operating, growing, and selling a business.

Fundamental Concepts for Understanding Cash Flow as a Business Owner

Small businesses are typically not run by business or accounting graduates. In fact, a CNBC Survey found that a “majority of small-business owners in the United States don’t have a college degree.” A finance background is by no means necessary for business success, but the diversity of pathways does mean concepts like cash flow planning are foreign to a lot of business owners. Many founders can and should offload day-to-day financial metrics tracking to an accountant or CFO, but by staying close to the cash, owners have a much greater chance of running a business sustainably while avoiding a lot of heartache along the way.

Cash Flow Planning Process

At a high level, the cash flow planning process consists of three steps:

Understanding your current statement of cash flows
Forecasting your cash flow for business goals, e.g. income, growth, sale
Identifying and executing on opportunities to improve cash flow

To build a cash flow statement for the business, your CFO will likely start with your income statement. He or she will take any financing or capital expenditures into account and make the appropriate adjustments for non-cash benefits and charges. With the statement constructed, it becomes clear whether something like higher-than-expected cash burn was due to poor performance, accelerating growth, or one-time cash outlays.

With current cash flow understood, your CFO’s next job is to forecast the company’s future cash flows, ensuring first and foremost that you don’t run out of cash. At Ascent CFO Solutions, our Fractional CFOs construct a three-year rolling forecast financial model. We begin with the current balance sheet and cash flows to forecast your company’s cash position over the subsequent three years and include assumptions around variables like revenue growth, headcount, capex, and discretionary spending.

After understanding and forecasting cash flow, your company can optimize cash-related processes based on its operating model. This could involve tracking metrics like accounts receivable (AR) to bring down your average collection period or accounts payable (AP) to bring your average payment period in line with your industry. If your business involves inventory, optimizing inventory turnover will allow you to operate sustainably with higher growth potential and tax advantages. An early-stage business, operating at a loss, will inevitably want to include fundraising plans in its cash flow forecast in order to grow or reach a profitability inflection point. Because some cash flow optimization opportunities are specific to an industry or operating model, it is important to find a CFO with experience that’s most beneficial to your company.

Cash Flow Planning Pillars to a Sustainable Business

Tracking and forecasting cash flow is important to the overall health and profitability of your business, and there are a few key areas that warrant particular attention:

Cash Flow Planning for Working Capital

As part of a cash flow forecast, your CFO should be projecting the average collection and payment periods to optimize working capital. By tracking these metrics over time and collaborating with your customers, you may be able to reduce your average collection period and improve working capital. Accounts payable is often industry-specific, and a high percentage of business to business (B2B) sales will typically indicate delayed cash flows. For example, if your customer is a distributor selling to a retailer before a final purchase by an end-user, cash flows could easily be delayed several months. That said, businesses can be reliable, long-term customers. You certainly do not want to throw them into collections and ruin the relationship because your company is facing a cash shortage that could have been avoided with proper planning or more frequent invoicing. A proactive CFO can explore additional options like low interest loans secured by the company’s accounts receivable. Another option for unique or high demand products may be to fund manufacturing through prepayments from customers in exchange for being early on the delivery list or eligible for special offerings.

For companies with inventory, such as eCommerce, retail, and CPG, tracking inventory turnover days will help determine the level of inventory your company can afford. Sustainable inventory levels will be different for every company. That firm mentioned above with significant B2B sales may have a higher average payment period that necessitates lower inventory levels. Inventory mismanagement can have an additional cash sting from taxes. Because expenses associated with building inventory are not recognized until that inventory is sold, near term taxes could be higher and lead to a cash expense if not planned for properly.

Cash Flow Planning for Sustainable Growth

Even when all your business trends are positive – demand for your products and services is up, the economy is strong, and there is a clear path to achieving your goals – keep a close eye on cash flow because growth often burns cash before earning it. Whether your business is purchasing new equipment, adding staff, or increasing marketing, there are likely cash expenditures that may not provide a payback for months or years resulting in negative cash flow. Cash flow planning around growth will help you make smart investment decisions while avoiding a cash crunch. Imagine that you have a manual production process and you are trying to decide between adding more staff or purchasing more automated equipment to meet demand. Your CFO can conduct a net present value (NPV) calculation that relies on discounted cash flow planning to determine which growth option provides a better return. Furthermore, by developing estimates for the company’s cash outlays and resulting increased cash flows, you can keep enough in reserve to pay bills and other obligations.

Cash Flow Planning Around Financing

Growth fueled by free cash flow is safe but it can also be slow. For business owners with a desire to expand faster than their free cash flow will allow, fundraising is the most common solution. Early stage companies often turn to venture capital (VC) firms to provide funding in exchange for equity. While your current operating cash flow may be negative, cash flow projections are critical for two reasons:

The projections determine how much cash you need to raise in the current round
The projections influence the value of the equity you need to sell

Your CFO can also help you plan beyond the current round of financing. A financial model like the 3-year rolling forecasts built by your Ascent CFO helps ensure that your business has enough cash to achieve milestones that will earn it a higher value in future rounds.

For more mature yet still fast-growing businesses that lack the cash flow from operations to meet their objectives, debt can be an ideal financing source. Your CFO should investigate all options to identify the appropriate products and secure the best terms for your company. A business credit card can help bridge the gap between AR and AP. For real estate or equipment purchases, a secured loan could reduce your interest rate by proportionately reducing your lender’s risk compared with unsecured debt. Your business may qualify for subsidized or special temporary programs put in place by the government that an experienced CFO can navigate. Finally, business lines of credit (LOC) are a flexible form of borrowing that can be put in place for either growth or contingency planning. Whether you choose to expand through equity or debt, your CFO can guide you through the process, avoiding pitfalls along the way.

The Intersection of Cash Flow and Exit Planning

A previous post discussed the link between thoughtful exit planning and sound business operations. Cash flow planning can be as important to a potential sale as it is to ongoing operations. Often a venture capital (VC), private equity (PE), or strategic acquirer may construct their own discounted cash flow (DCF) model to determine a valuation for your company. DCF values a company by estimating how much cash a company will generate in the future “discounted” for various factors like risk, inflation, and opportunity cost. It is a model based on assumptions, with expected future cash flows being one of the most difficult to pin down. If your CFO has consistently projected cash flows as a standard business practice, you will be able to provide an acquirer with realistic estimates and sound explanations that lower your company’s risk profile and earn a higher business valuation.

For business owners planning to make their exit in the form of a transfer to children or sale to key employees, cash flow and growth projections can be even more important. These buyers are unlikely to have the same cash resources as VC, PE, or strategic buyers. The “buyout” may take the form of your receipt of a percentage of cash flows over many years as you separate yourself from the company’s operations. If you rely on the income to retire, it may be prudent to build certain triggers into the transition process where you re-take control if metrics like cash flow deviate from pre-determined bounds. Finally, cash flow planning can help guide when you exit because you will have an idea when the company is generating enough cash for you to meet your personal financial goals.

Fractional CFO for Cash Flow Planning

Cash flow planning requires a holistic view of your company’s finances to bridge the gap from the profit/loss reflected on an income statement to the company’s cash flow. Cash projections are multi-faceted calculations requiring inputs including:

projections of collection, payment, and inventory days
variance between income and cash flows
growth rates, tax rates, and financing options
changes in business dynamics, like customer and product mix
the business owner’s risk tolerance

As such, cash flow planning is a science and an art that requires the knowledge AND experience of a seasoned CFO to make the correct assumptions and allow for variances in unknowns. The problem for many small businesses is that they do not have the financial capacity or the operational need to support a full-time CFO. An effective alternative might be a Fractional CFO that can offer your business flexibility to match what you need with what you can afford, prioritizing mission critical objectives. If your business needs are unclear, a Fractional CFO can assess the situation from the ground level and make recommendations based on their findings. On the other hand, your investment decisions might be clear, and your income statements reliably match projections, but you have struggled managing cash flow in the past. A Fractional CFO could take on a specific task like cash flow planning to fix what’s broken and keep what’s working.

Cash management can be the difference between a flourishing organization and a company struggling to meet its obligations. Proper cash management depends on an accurate cash flow plan built on tracked metrics and reasonable assumptions that incorporate future business goals. Given the skill set required, coupled with potential uncertainty around your current cash position, a Fractional CFO could be a great resource to figure out where your business stands today and help create a roadmap to where it’s going.

A Fractional CFO’s Role in Exit Planning and Business Transitions

Written by Ascent CFO on May 26, 2021. Posted in Blog.

Change and growth are part of life, especially for anyone running a small to medium-sized business. For many, exit planning implies a sale to private equity (PE) or an acquisition by an industry strategic, but in reality, businesses undergo multiple transitions from one stage of operation to another. Whether your business is transitioning from a pre-revenue stage, shifting from a growth to profit focus, initiating a fundraising round, or putting the company up for sale, a great CFO, whether full-time or fractional, will always have your company prepared.

A CFO’s Exit Planning Role

Putting your company up for sale is a complex process with many moving parts. While the goal of the executive team is to maximize a company’s value, the CFO has the critical role of making a fact-based case to buyers and investors that your company will be a great addition for them.

A good CFO needs to keep the company finances in order at all times, but when it comes to the sale of your company, an excellent CFO will also serve as a:

Metric Analyst
Data Translator
Operations Expert
Financial Strategist & Predictor
Diligence Watchdog
Empathetic Leader

While not immediately obvious, each of these roles is critical to the exit planning process, and it takes an experienced CFO with a diverse skill set to be proficient in each.

Your CFO as a Metric Analyst

When it comes time for a sale or fundraising, investors are always going to make an initial assessment of valuation based on the financial statements. They will likely use multiples on current or future Revenue and/or EBITDA; they might perform a discounted cash flow analysis; they could focus on market size or sales potential if pre-revenue, or any combination of metrics available to them. A 2015 Deloitte survey asked: “In which ways can a successful CFO positively impact EBITDA?” 71% of private equity respondents selected “high quality management to enable decision making” which is higher than any other category surveyed. The CFO’s strong management of information and KPIs (Key Performance Indicators) could positively impact the EBITDA multiple that they would pay for a company.

Your CFO as a Data Translator

The CEO and executive team require accurate information to make decisions and set a vision. The CFO needs to develop and clearly present the critical metrics in order for an external investor to have the confidence to buy into your company’s value proposition. The presentation may include high-level or functional-level dashboards, financial metrics, or a pitch book with as much detail as an investor needs. Every business goes through difficult periods, but if your CFO can explain why the company missed an internal target, how the company got back on track, and what procedures mitigate exposure to the same or similar events in the future, it will build, rather than deteriorate confidence in the fundraising process.

“Every business goes through difficult periods, but if your CFO can explain why the company missed an internal target, how the company got back on track, and what procedures mitigate exposure to the same or similar events in the future, it will build, rather than deteriorate confidence in the fundraising process.”

Your CFO as an Operations Expert

A company’s founder, CEO and COO have a direct impact on a company’s vision, operation, and strategic decisions, but the CFO’s data and analysis informs those actions. The same Deloitte survey referenced earlier found that 79% of PE investors and 90% of CEOs stated that CFOs enabled decision making that positively impacted profitability. As a metric analyst and translator, it is easy to see why a good CEO is perfectly poised to help the executive team or an investor understand where the company is outperforming competitors while identifying areas for improvement. This assistance could take the form of assessing net present value calculations on investment alternatives, monitoring inventory levels, or proposing cross-functional operational spending levels.

“79% of PE investors and 90% of CEOs stated that CFOs enabled decision making that positively impacted profitability.”

Your CFO as a Financial Strategist & Predictor

A truly attractive acquisition candidate will stand out by having a believable and supportable forecast demonstrating significant future growth. A CFO’s ability to present and defend those projections creates that additional premium. It can be the difference between a 5x revenue multiple or a 10x. In fact, 55% of PE and CEOs stated that a CFO’s ability to provide evidence that supports a company’s growth narrative was one of the top three most important factors influencing the premium paid during an acquisition. Your CFO should be able to build out projections utilizing a 3-year financial model with sales, earnings, and cash flow targets. They should provide a range of targets with a nominal base case, up to stretch goals, down to mild underperformance, and even contingency goals preparing for unexpected, external events. Perhaps most importantly, your CFO should be able to explain the data and assumptions that went into the company’s financial forecasts, while fielding questions and setting an investor’s mind at ease.

“55% of PE and CEOs stated that a CFO’s ability to provide evidence that supports a company’s growth narrative was one of the top three most important factors influencing the premium paid during an acquisition.”

Your CFO as a Diligence Watchdog

PEs, VCs, even Angel investors are going to take the diligence process seriously as they look to uncover cracks in your company’s history and financial projections. Continuous diligence means your CFO understands financial variances during the normal course of business and will always be prepared to explain aberrations in the company financials. By consistently monitoring KPIs, not only will your company avoid pitfalls and capitalize on opportunities, but prospective investors will be well informed from the start, leaving fewer surprise discoveries during their own diligence process. Accurate projections are equally important as investors will want to ensure the projections at the start of a deal process are either met or exceeded before closing. There’s a fine line between achievable projections and an underestimate resulting in a lower valuation. However, a CFO can assist in negotiations that establish a reasonable baseline, with additional benefit if the company can achieve its stretch goals.

Your CFO as an Empathetic Leader

Even the most skilled CFO cannot put together accurate financial statements without reliable information from a trusted team. Data reporting can be automated at some level, but the subjectivity of projections and growth plans requires input from the front line. As an empathetic leader, the CFO can instill cost reporting discipline and act as a guiding hand for managers to track their metrics according to best practices. Bad news is never pleasant, but it doesn’t get better with age and is even worse when it comes to light during diligence. It’s important to emphasize transparency and build trust, encouraging leaders to come forward with accurate data.

Avoiding Deal Killers

Exits are complicated, emotional, and fraught with transaction ending pitfalls around every corner; fortunately, many are avoidable with the right planning.

Here are a few deal destroyers that an experienced CFO can help you avoid.

Inaccurate Financial Projections

If you set projections that are too aggressive, and the company fails to meet them, your buyer will quickly lose confidence, ask for concessions, or call the deal off entirely. Set your forecasts too low, and you will sell the company you worked so hard to build for less than it is worth. Developing accurate financial projections may seem like it requires the balance of a high-wire act, but your CFO should be making financial projections for years before they ever appear in front of a buyer. The rest of your management team needs this data to make strategic decisions, so the CFO should have a solid understanding of business operations and industry dynamics.

Furthermore, your CFO can institute a sound financial reporting structure with automated systems in place and a culture of transparent, upward reporting. CFOs also add value by making a numerical case that your company could be worth more as part of the buyers organization. There may be shared accounting or branding synergies, especially if the buyer is considering a roll-up merger to form a more complete product offering or end-to-end service.

Time, Delays, and Lack of Preparedness

“Time kills all deals.” External events, failure to meet forecasts and even deal fatigue can cause transactions to fall apart. In reality, a company has a very short window of opportunity to assemble bidders, make its value known, build trust, and close for the highest price/best terms possible. Failed sale or investment processes could result in year+ delays or a down round to the chagrin of existing stakeholders.

Because an involved CFO has their finger on the financial pulse of your company, they’ll be able to provide quick turn-around time when it comes to:

Show audit-ready data and financial analysis
Populate, or pre-populate, the data room
Share cash-flow, sales, and profit forecasts
Field questions, explain assumptions, or generate alternate forecasts
Weed out unqualified buyers or bad fits

When a prospective buyer asks for access to your data room, there’s a huge difference between: “here’s where you can find financial metrics for the last 5 years that we continuously update as part of our standard operations”, and “we’ll get back to you on that.”

Diligence Surprises

A Forbes article found that 50% of all sales processes fall apart during formal due diligence. If the buyer discovers a material issue that the seller fails to disclose, its effect is magnified, and the fragile trust that has been forming is instantly shattered. Lawsuits need to be revealed, discrimination accusations explained, and where the CFO is concerned, financial statement inconsistencies and projections need to be explained.

There have been some high profile M&A failures and in all but the hottest seller’s markets, a potential buyer would much rather kill a deal than take the blame for closing a bad one. For example, when Bank of America purchased mortgage provider Countrywide in 2008, BoA spent $2 billion, and acquired little more than ~$50 billion in bad debt. As the seller, this might sound ideal, but even when an aggressive buyer rushes through their diligence, lawsuits for fraud against the seller could prove disastrous. Continuous diligence by the CFO helps ensure your company will head off any financial anomalies early in a deal. Investors should not discover anything new during diligence, because everything should already be revealed and discussed on your terms.

“Continuous diligence by the CFO helps ensure your company will head off any financial anomalies early in a deal.”

Good Exit Planning is Great Business Operation

Tracking metrics, maintaining a rolling 3-year financial forecast, and continuous diligence requires a lot of work. Fortunately, these exit planning necessities provide extraordinary value to daily business operations. While not exhaustive, the table below highlights how many components of a CFO’s job simultaneously contribute to a healthy, stable business, while maximizing the exit sales price.

CFO Responsibility Chart-Ascent CFO Solutions3.png

When you’re trying to run a business, exit planning might feel like an easy action item to push to the bottom of your priority list. However, many of the steps a CFO would take to prepare for a sale directly benefit business operations saving a lot of time and money along the way.

Fractional Vs. Full-time CFO for Exit Planning

The best exit planning begins the day you start your business, but that doesn’t always feel practical. We know a CFO plays a valuable role before and during an acquisition, but for many entrepreneurs, employing a full-time CFO from day 1 is impractical from a cost perspective. Some entrepreneurs add the CFO role to their list of responsibilities, but by the time they consider an exit, their financial records and projections are in a state most potential buyers would find unacceptable. A junior accountant may be more affordable and can help with bookkeeping, but when it comes to projections and strategy, a buyer has potential to poke some holes in your plan and quickly lose confidence.

For many, a Fractional CFO can be an affordable alternative that not only brings the diverse skill set and depth of analysis of a full-time CFO, but can also be present at an early stage providing valuable financial data and projections from start to finish. Not only is this an asset during exit planning, a good Fractional CFO will help you run your business, make more informed decisions based on data, and help develop contingency plans to prepare for an unexpected change in circumstances.

“A Fractional CFO can be an affordable alternative that not only brings the diverse skill set and depth of analysis of a full-time CFO, but can also be present at an early stage providing valuable financial data and projections from start to finish.”

Flexibility is key in business, especially at the small to medium size, and a fractional CFO can offer you flexibility both in hours and scope of work. A Fractional CFO can tailor a customized solution to your business and guide you to the next step.

You Don’t Have to Build a Unicorn

Written by Ascent CFO on February 16, 2021. Posted in Blog.

In the start-up world, it is nearly impossible not to be distracted by all the noise around Unicorns and feel pressure to match the pattern of always getting to the next round of funding.

The venture capital mantras of “go faster”, “hockey stick growth”, “multiples upon multiples”, and “crush the competition” are a lot of pressure for founding teams. While many succeed pursuing the Silicon Valley VC-backed company model, many many more fail. In reality, only about 1% of start-ups make it to Unicorn status, and only around 10% of start-ups succeed. The primary cause of failure is running out of cash.

What you don’t often hear from the venture community is: go slower and be more deliberate, get to profitability, take no more capital than you need, keep control of the company, beat the competition by building a superior product and team (which takes time) and you don’t have to build a Unicorn to achieve a life-changing exit.

There is not enough discussion about how to grow a business model that does not have to pattern match the hyper-growth Unicorn model. No one writes articles about all the companies with exits under $100M that only took a small amount of venture money, maintained control of their company and had a life changing exit. In fact, a $50M+ exit is often more meaningful to the founder than the $1B exit.

Start-up founders should know that there is a different way to build a business where you take less capital, keep control and still get to a meaningful exit. Here are the key ingredients to make it happen:

1. Build a great business

The VC rule of thumb of building a valuable company around product, customer and team stays true. You still have to build products that people will want to buy and you have to build a big enough company that would be meaningful to an acquirer. Just the pace of how you get there may be different.

VC- backed start-ups are often pushing growth at the same time the business is building the product, trying to figure out product/market fit and scaling their teams. It’s a lot all at once, it burns a lot of cash and it’s unlikely they will get it all right. An alternative is to keep cash burn low or at break-even if you have sales. Focus on getting the product dialed-in and invest just enough in sales and marketing so you achieve market validation and can dial in your sales execution strategy. Build your team by adding the right people at the right time.

2. Pick the right growth strategy

There is no rule in business that says you must have hockey stick growth where you are growing your business by 300% year over year (this is also known as 3Xing). This is a pattern required by venture capitalists to make sure portfolio companies are hitting valuation multiples required to get 10X returns.

Only about 1 in 10 VC investments actually achieve a 10X return. If you are in the VC-backed game and not showing that 3X growth leading to the promise of the 10X return, you will struggle to get the value you need to close the next round. You might end up with an upside down business model because you made a lot of decisions to push that growth and burned a lot of cash to get there. Once you are on the VC funding round train it is really hard to get off.

What seems to get missed in all the talk about hockey sticks and unicorns is that 100% or even 20% growth is fantastic! Building a business is a marathon not a sprint, and slow steady growth can be a huge win with a lot of benefits. Steady growth could mean you cash flow the business and don’t have to take additional investment. You can have a healthy balance within the organization where you are properly scaling the team and processes. You will likely have a happier team than you would in a hyper-growth environment where there is a lot of pressure to meet fundraising milestones for fear of not making it to the next round.

3. Develop a capital efficient business model

The key is to get to profitability at a reasonable growth rate without having to burn a lot of cash. Experiment. Dial in your sales and customer acquisition strategy by trying several things and don’t invest heavily in sales and marketing until you know 1) what go-to-market strategy works and 2) exactly how much cash is needed to grow and support growth from an operational standpoint. Build out a detailed forecast of how to get to profitability in the most capital efficient way possible. Be diligent in how you invest your funds in the business.

4. Take the right investment

The vast majority of the large VC funds you’ve heard of are not interested in writing you a small check to achieve a $100M exit. They want the Unicorns. But there are plenty of smaller and more focused funds and angel investors out there that can see the value in a non-unicorn exit. Be sure you are taking money from the right partner.

Just because someone is offering you $5M for 30% dilution does not mean you have to take it. Only take the money you need. For example, could you take $2.5M instead of $5M for 15% dilution and get to profitability? Does that allow you to not have to do future rounds and keep control vs turning control over to the investors? If you were able to take less capital, get to profitability, only grow by 100% next year vs 300% and still keep control of the business, wouldn’t it be worth it to go a little slower?

5. Get creative on different ways to fund the business

There are plenty of new financing vehicles outside of traditional bank loans and VCs that have come on the market in the past few years such as revenue loans for SaaS companies or non-bank equipment financing. Can your customers help fund your business? Are there terms you can build into your contracts that will accelerate cash from customers such as offering a discount for paying for a year in advance, pre-billing for implementation services, or requiring partial deposits before orders are shipped? Getting accelerated payments from customers is one of your cheapest and easiest sources of funding the business.

Once you hit profitability your options expand to include traditional bank financing options that are not available when you are burning cash.

While your VC investors may pressure you to go faster and hit milestones so you can get the value on the next round of funding, if you can show them a path to profitability and an exit with a good return on their investment without taking further funds, they will be happy. They may still say “go faster” because it is in their DNA, but if you are not taking more rounds it also means they are not taking further dilution or having to write more checks to hold their ownership. An exit at a good valuation with less dilution is a win/win for everyone, even if it took you a little longer to get there.

One final note is that there is nothing wrong with building a company and not selling it. You can run the company and build your own personal wealth to pass on to your family. Or sell the business in 20 years. Lifestyle and family owned businesses can build tremendous wealth.

You don’t have to build a Unicorn.

Planning for 2021 in Uncertainty

Written by Ascent CFO on December 7, 2020. Posted in Blog.

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.

Cash Flow Planning Can Make or Break Your Business

Fundamental Concepts for Understanding Cash Flow as a Business Owner

Cash Flow Planning Process