We’ve all heard the pithy phrase: “Cash Is King”. It was true in 2008 when Citibank stock was trading for under $1.00 and it is evermore true today.
Cash is everything in a startup. It is the jet-fuel that keeps the plane flying. Tech startups fail largely because they run out of cash, not because of lack of good ideas or execution.
When working with a company I’m more interested in expense control than the overall budget. Revenue forecasts are so frequently wrong as to only be valuable in providing insight into the Founders’ realism and experience.
Cost and cash control are far more important, both in numbers and allocation.
While forecasting cash is more art than science, particularly in an emerging growth company many unpredictable costs (revenue, R$D costs, rent, receivables, and so forth).
It’s boring, it’s not in most Founders’ wheelhouse, but it’s a skill that the Founder MUST practice and develop. To become good at it, and I can argue it is one of the most important and often neglected practices, Founders must engage in it regularly. Not only must they deal with changing conditions, and their impact on operations, but also to contemplate potential future changes.
When I did a turn-around early in my career after I left the nuclear submarine service, I developed a methodology that looked at the important parameters on a set frequency; some daily, some weekly and a few monthly. That practice not only helped me manage the turn around, but it helped me train my staff so that 24 months later I worked myself out of a job and went to law school.
As a company matures, perhaps around the time of a Series A round, and has repeatable revenues, and has a reasonable balance sheet, business and cash balance planning can be quarterly, semi-annually and perhaps even annually.
Early stage companies need to engage in cash forecasting much more often. I like to see Founders that always know what their runway is and how to extend it if necessary. That way, they can deal with unforeseen events like today’s covid-19 crisis. There is a back and forth between cash management/forecasting and operating. They are opposite sides of the same coin.
I like to see a model developed and updated weekly and it is best to do that as a team, making it it abundantly clear to everyone how operational decisions impact cash and runway.
In today’s crises, I am seeing companies reduce cost in many of the following ways:
- Cutting Office Spend
- Cutting Marketing Spend
- Hiring Freeze; Layoffs
- Making Product Changes
- Renegotiating Contracts
- Office Lease Terminations
- Salary Reductions
Which do you think are best for your company?
Reach out to me about how to reduce legal expenses.