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The Start-Up’s Guide to Extending Your Cash Runway

April 10, 2024 by Megan Esposito Leave a Comment

If it’s been a while since you raised funds for your start-up business, and your cash runway is starting to resemble your personal bank account – a bit thin — you’re not alone. There are fewer potential investors and those that are in play are taking longer than ever to make investment decisions, especially in new companies. If you’re barely hanging on, trying to retain your team and make it to that next inflection point for your product or service, here are some simple ideas to extend your runway and avoid finding yourself in a desperate situation.

Control the Outflows

You should have a strict policy on who spends what with signoffs from your CEO or CFO. There are certain expenses such as travel & entertainment and consulting that are the “canaries in the coal mine” and are leading indicators for how you are managing your spend. You should know where every dollar is going before it is committed.

There will be an increasing number of portfolio companies and VCs who need to shut their doors in the coming months

Plan Ahead

If you only have 3 months of cash, it is too late to make meaningful cuts to extend the runway. For example, if you have to make the difficult decision to reduce your staff, the impact of those savings is magnified for each month in which you implement them.

Consider Alternative Means of Fundraising

While VC-led rounds of equity financing are desirable, consider raising money using a SAFE (Simple Agreement for Future Equity) or convertible note. These mechanisms avoid the difficult negotiations involved with a priced round and defer that decision until later. SAFEs and notes offer incentives such as interest and discounts to the next priced round for those who participate. Grants from the government or mission-driven foundations can also be an excellent means of bringing in precious capital.

Milestones

You need to clearly understand your milestones or key inflection points because those will be the triggers for raising capital at increasing valuations. Your cash runway needs to get you, not only to the next milestone, but you need to have 3 to 6 months to review your data and pitch the accomplishment to potential investors.

Pass the Hat

Many VCs are rightfully focused on their existing portfolios and keeping those companies healthy is their primary objective. VCs are scaling back their new company investments and triaging their portfolios. There will be an increasing number of portfolio companies and VCs who need to shut their doors in the coming months. As such, your current investors are the best and most immediate source for emergency funding, but they will want assurances that they are bridging your company to a meaningful milestone on which you can raise additional funds.

These difficult market cycles are just that – cyclical. With some advance planning and by using all the tools at your disposal, you should be able to position yourself for success.

Filed Under: Finance Tagged With: cash management

CFO Survey – Would you add Bitcoin to your balance sheet?

April 27, 2021 by Megan Esposito Leave a Comment

Bitcoin as a store of value and payment mechanism has been growing in acceptance as evidenced by some publicly traded companies putting a portion of their cash reserves into the cryptocurrency.

Tesla invested more than $1.5 billion in Bitcoin to its corporate balance sheet, noting that the purchase was made with cash not needed for operations.  Time Magazine, owned by salesforce.com inc.,  said it would also add Bitcoin to its balance sheet.  MicroStrategy has aggressively urged companies to shift corporate cash into cryptocurrencies like Bitcoin, and also announced it would be paying Board Members in Bitcoin.

TechCXO wanted to know where its CFO partners stood on the issue, so we surveyed 25 CFOs.  Many TechCXO clients are privately-held technology startups, and we asked them:

Resistance to Risk, Preserving Limited Cash

By a wide margin, TechCXO CFOs said they would not put cryptocurrencies onto client companies balance sheets. There were 21 “No”; 3 “Yes” and 1 “Maybe”.

When looking at the comments, the resistance was not necessarily due to not seeing crypto or Bitcoin as a legitimate asset, but more in response to their clients’ current cash and risk profiles. Some of the  comments added are below.

Currently I would not. Bitcoins are accounted for as intangible assets in the U.S. You cannot recognize gains until you sell but do have to write-down impairment if the price drops. Most of my current companies have limited cash resources. As such, they are risk averse.

Cash requirements precluded consideration:

Crypto is volatile. Our clients’ main goal with their funds is principal protection. Not until they have significant excess cash would I consider this as an investment thesis.

And:

The volatility of cryptocurrency erodes the ability to preserve capital. Most of my companies do not have enough capital to put it at risk.

However, some with more significant cash reserves would consider higher risk investments, even amending policies to do so:

One of my current clients, publicly traded, has raised a significant amount of equity that we have difficulty investing for any type of return. We have discussed amending our Investment Policy to allow up to 10% of investable cash for higher risk/higher reward investments, like Bitcoin.

Still others are ready to go:

One client I have has indicated he wants 5% – 10% of fundraising proceeds to be deposited in Bitcoin.

Filed Under: Finance Tagged With: cash management, CFO, Equity Management

Managing Cash: Look Here

July 28, 2020 by Megan Esposito Leave a Comment

Look Inside, Outside and Across

Try to run your car while neglecting the engine’s oil and the results are predictable. The same is true for running your business without proper attention to managing cash. Where should you focus your attention? Three areas: Inside. Outside. Across.

#1 Inside. Start with the “inside” of your company when managing cash.  First, you want to have a firm grasp of all revenue and cash assumptions in the forecast. Do this by going right to the source: the sales organization. With tools like salesforce.com and other CRM-related software, there’s really no excuse for surprises or gaps between revenue forecasts and cash. The CFO and VP – Sales should be talking weekly about incoming orders and forecast realization. Consider too, moving to rolling forecasts as opposed to only annual plans. Weekly, monthly, quarterly rolling forecasts will give you a closer, more dynamic look at the organization. Don’t, however, discard your in depth 12-month look at the organization.

This is the third of a four-part series from TechCXO focused on Managing Cash and Optimizing Profits. See Part 1: Math Behind Growth. See Part 2: Should CFOs Advise Sales?

Second, in tough sales seasons, the sales organization might be more inclined to create special terms. That may be OK, but the CFO should be on top of all of the financial and credit terms the sales team extends to prospects, and should have the power to approve or reject exceptions to standard terms.

Third, manage commissions wisely. A good rule of thumb is to hold back the last third of sales commissions until the money is in hand and not just housed in accounts receivable.

#2 Outside. Your second area of focus is “outside”, meaning tight management of receivables and vendors. When receivables go outside of your Net 30 Day terms, start calling customers on day 31, not day 40. Call consistent payment laggards even a little earlier.  You will be setting expectations for how you expect to be paid.  You also want to be prepared to be tough with stopping shipments and services for customers who are slow to pay. This is particularly important with newer customers.

While you may not be granting much grace in your receivables, you may want some grace extended to you from your vendors. Depending on your relationships with key vendors, you may need to stretch typical Net 30 days to more like Net 60 days. Be warned, however, staying under Net 60 in your accounts payable will keep you off your vendors’ radar, but you don’t want to go out to 75 days. Your reputation runs a major risk of getting dinged, and there could be pricing implications… word spreads fast.

#3 Across. By “across”, we mean that you leverage every tool possible across available financial vehicles. For example, we
always recommend to any company with cash balances of six figures and above to have sweep accounts, as in “sweep” your cash into an interest-bearing overnight account.

Another caveat: while it’s good for your cash to be working for you, don’t keep your primary cash accounts too close to zero.  Banks need to make money and they are always watching. Have a chat with your banker, to make certain that you are in sync. They may be more than glad to execute a sweep account if they manage your “available” cash for you . You’ll need a track record of a healthy cash account just for aesthetics and if the need arises to get some additional capital. Investors and creditors like to see healthy cash amounts.

Filed Under: Finance Tagged With: cash management, CFO

managing cash and optimizing profits

July 28, 2020 by Megan Esposito Leave a Comment

If you think your CFO’s contribution to increased profitability is only from cutting costs, think again — you may be looking past your biggest pro-growth asset.

A New Attitude: CFO as “Growth Strategist”

A CFO’s job is to spend money. That’s right… spend money. The association with finance executives and cutting costs has twisted the true function of your top finance executive. The CFO pays employee wages, pays vendors, pays taxes, pays rent, pays benefits, pays utilities. They are constantly spending money. And yet the association with CFOs as an agent for growth and profitability is almost non-existent. That’s a mistake.

Since the CFO is the biggest spender in your company they also know where the money is best spent. Here are three ways to leverage a CFO or finance executive’s capabilities to increase margins:

1. Understanding the Math behind Growth – In a typical company a 1% improvement (increase) in your price will generally create an 11% increase in operating profit. Let’s repeat that: a 1% improvement in price will create an 11% increase in profit.
By contrast, a 1% improvement in variable costs gives you a 7% increase in profitability and a 1% improvement in fixed costs gives you only a 3% profitability bump. We naturally turn to CFOs to help improve costs but do we bend their ear about pricing? What
about discount incentives or pricing inventory for clearance, promotions, or incentives?

An experienced and strategically-minded CFO should have a seat atthe table when setting prices, discounts and contract-terms for your company.

2. Add Value First, Reduce Costs Second -This dovetails with the math of point #1. Instead of just seeking to take costs down by 10% (you shouldn’t stop trying to do that), also look to add value that will justify a sales price increase of 10%. What services an features can be added inexpensively? Added value equals higher margin gain. Customers will expect you to pass costs savings onto them anyway so look first at adding value, benefits, margins, such as more expensive warrantees before reducing costs.

3. Looking Under the Right Rocks (for Costs) – Most organizations will look to attack costs where they “feel” things are the most wasteful. Bad idea. You need to prioritize the search for cost improvements by tackling the largest dollar chunks in the product/service production and delivery stream. For example, if you produce a $100 product that costs $10 for assembly and $50 for key components, but you know your assembly has excess costs in it, don’t waste time in the $10 assembly system – go immediately to key components. Maybe you can shop for new component vendors or change the contract structure.

You can engineer-out more dollars attacking big items than you can in sweating out more efficient operations.

Filed Under: Finance Tagged With: cash management, CFO

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