How a previous business almost ran out of cash (and what we did to fix it).

February 20
4 min read

In 2014 we were doing everything and nothing right. Fist bumps and high fives as our bank balance ticked over $1m in cash. Growth and more growth. We’d come from nothing to more than $3m in revenue across a combination of product and service offerings. One office became two. Two small offices became one bigger office. Shifting, moving, hiring. The spreadsheet we’d used since day one was on version 12. What we didn’t see, until it was too late, was that we’d carpeted ourselves into a corner. Our cash reserves were based on promised deliverables for a large project and our hiring had grown disproportionately.

Two months into the project we noticed that the financial model we had made that showed a steady growth rate over 12 months wasn’t lining up to where we really were. It required an unravelling of the monthly numbers to understand in detail where things were derailing. And those two months were costly. Four months into the project we let go of 10 staff, a mixture of employees and contractors, in order to return to positive cash flow. I vowed I would never again mismanage the business and finances and set about creating a process to ensure we didn’t.

In a way, the $1m in cash and our steady growth up until that point distorted where we were as a business. Our financial model and meetings as a management team made it feel like we were being disciplined and responsible. The reality is, as Founders, we need to be responsible for and across everything. Finance and cash management aren’t the reason you got into the business but it’s unfortunately one of the causes of going out of business.

It’s easy to manage finances when the “number goes up”. However, fair weather sailing is not a test of one’s mettle it would seem. The following are some of the lessons we learned based on mistakes made over the years in business.

Keep your model simple

The first urge when people create a process to help them manage anything is to pack it full of features. Fields and columns and formulas in excel, bells and whistles to capture and keep track of things. The problem is this eventually becomes a complex and unwieldy process to manage and keep things accurate, let alone provide clear answers to questions. Most importantly, there’s usually one person that understands the behemoth that emerges whilst everyone else scratches their head and assumes things are under control. By sticking to a simple model and ruthlessly pushing back on expanding on models and adding complexity, the whole business can collaborate from the same set of information. In our case, ensuring our financial model could be consumed easily on one screen was important to establishing consistency and clarity. Too big and too much scrolling meant people got lost when trying to understand the financials.

Agree on key metrics

There are usually some key numbers that stand out and need to be managed. Everything else can be a distraction. What you need as a business founder also differs from what the accountant needs, the bank, investors, directors, etc so don’t be concerned that your important metrics don’t fit with others. For a lot of founders, key metrics will include bank balance, and burn rate. Just be aware that these become more complicated to deduce as the size and complexity of your business grow.

Know exactly what your bank balance will be on any given date

If your cash flow is tight, meet with your bookkeeper regularly. Make sure they are clear that any deviations from the plan and forecast should be flagged with you immediately. Implement a financial control process and above all else, treat cash with the importance it deserves.

90% probability sales are not sales

It’s tempting to include projected revenue amounts for unsigned contracts in your financial model. The impact of a 90% probability contract not being signed however is significant if you’ve had to take on more cost to accommodate business that doesn’t eventuate. Ensure you have a plan for accommodating either scenario and don’t bank on any business until it’s signed.

Conclusion

We’ve spoken to founders that have only experienced the up and never had to check their bank account. I’ve found some that hired and found a great CFO from day 1. The vast majority we see, however, are doing this on their own or with an accountant and have had at least one low cash or tricky timing experience. It happens to all of us eventually so having clarity over your cash position, having a plan that is simple to update and follow will help reduce the number of low cash episodes. Meet regularly with your bookkeeper and have them flag anything that deviates too much from the plan or could impact your cash position. Lastly, cash is king for a reason as it’s the blood that circulates around your business and allows it to keep functioning so make sure that your business isn’t relying on future, unconfirmed business for its survival. Discounting anything that isn’t signed, if you are in a tight cash position is crucial to avoid impact on your business.

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