Running out of cash can be a sign that your product or service isn’t needed. It can also occur when a founder or CEO needs more time or has competing priorities that make keeping an eye on cash in hand challenging to grasp the business’s finances. Both are disheartening scenarios, but going broke due to a technicality or lack of clarity can be cruel [1]. In 2019, more than 129,000 businesses across five countries declared bankruptcy [2]. In a post-COVID world, and with stimulus drying up, trading conditions are becoming tougher. With the rise in inflation and interest rates globally, tighter cash management and diligence around pricing and cost control are essential.
Maybe your business sounds like this.
You work with businesses who buy your products and services and pay you quite well for them. Each invoice you raise is critical to your success. It impacts your business if it comes in late or slips through the cracks. When it all goes well, it hums, but it can get stressful if it doesn’t. You’ve got many moving parts with salaries and costs increasing, staff and contractors leaving and joining, and some of your contracts stopping and starting. There’s no longer one “cash burn run rate” for the business as it moves and changes daily. Perhaps like others, you manage things in a spreadsheet which was great when you were smaller, but now the monthly spreadsheet summary isn’t helping as your business complexity has grown. You feel like you have a plan laid out, but often, the reality ends up being quite different. You run things monthly; however, any differences in your forecast can be slow to identify. It can be several months before you realise something has been going wrong, and you need to take action.
As you grow, businesses become harder to predict.
Businesses are often relatively straightforward until they aren’t, either through an unexpected curveball or stealth complexity. Growth only sometimes works predictably at a nice linear pace, where you can easily add people and resources to accommodate any new business. Successfully managing change requires an understanding by you as the Founder / CEO of how each of your revenue streams works and the possible responses and triggers to pull when you get served outcome A, B, or C. Visibility and speed are critical ingredients for success. It takes courage and grit to be in business, and as business owners, we often struggle to plan and understand a “worst-case” scenario. This is because it’s usually a difficult conversation, even with oneself. Even if we plot out what could happen, most will only act on it once things go wrong; by then, it could be too late. However, we can use cash as an indicator of company health, ensuring we maximise reserves where possible and reduce spending until a sufficient cash buffer is in place. Think rainy day planning. It often takes longer for money to come in than for it to leave. So managing to a buffer and prioritising incoming payments so payroll and staff payments can be prioritised can make finances less stressful and keep you focused on key factors that keep your business moving.
To spreadsheet, or not to spreadsheet
We ended up with 12 versions of our financial model at a previous business, each time adapting as the company grew. As you can imagine, that spreadsheet became large, complex, unwieldy and buggy. This was both time-consuming and sucked up scarce resources. We eventually needed to develop a dynamic tool that provided real-time data with minimal effort. Excel didn’t cut the mustard for us anymore. We needed a straightforward, simple model to take action on quickly. Excel can work well for this to a point. It remains the product of choice for millions due to its flexibility, familiarity and accessibility. Where Excel does really well is for the bespoke stuff. Keeping your core business in a platform that looks after the integrity of the information and the calculations automates the forecasting aspect and give you a baseline to conduct your financial control process is advantageous. From there, you can export your business and model scenarios or mock-up what ifs as and when required. Returning to the platform as the source of truth removes the pitfall of multiple models and versions of the finances. At Cashbucket, we’re big believers in using Excel and unleashing its modelling power when and where it is required. Where it needs a bit of help hand is when the complexity of your business starts to get hard to manage in a spreadsheet. Perhaps your company has hundreds of point-of-sales transactions a day. Managing everything in Excel becomes unwieldy, formulas break, typos and errors happen and updating everything becomes time-consuming and nerve-wracking.
Have a regular process in place
By having visibility over what you expect to happen, right down to your expected daily cash balance for the next 12 months, you can quickly adjust and respond to trading conditions changes. This stops the “just a number on a screen” issue and turns it into a dynamic plan that can be adapted. This is what we built the first version of Cashbucket to help us do. As the business grows, adding a financial management role or person to the accounting and bookkeeping roles is normal. However, that person will also need assistance understanding the business and the operational changes that impact the finances. So on top of filling one role, you’ve created a new one, communicating with finance. This is where things can be missed, and frustrations and misalignment occur. It is essential to make sure you have a routine of focussed financial control discussions. This works best when it is a fortnightly meeting where you sit down, review the expected transactions for the last two weeks versus what actually happened and then add in changes that are happening in the business. This means you can then re-forecast the next 12 months to capture all of your business changes and take action on any invoice chasing or follow-ups if money hasn’t come in or is different from what was expected. Of course, each business is different so finding your own rhythm is essential. That could be weekly, bi-weekly, or monthly depending on your needs.
Building a kick-arse finance process and team
What is Financial Control?
Finances in a business comprise many different elements. From accounting and ticking the boxes to modelling and forecasting. Many business owners underestimate the importance of solid cash management and need to learn or care about financial control. If you have capital on tap and are in growth mode, you can avoid prioritising cash, but only some of us are in this situation. These days, if you’re a founder of a B2B business with large ticket-sized products and contracted services that stop and start, things get pretty lumpy and financial control is how you deal with lumpiness. It can be as simple as having a plan that is easy to follow and taking action when something changes. But what it must have is a regular communication channel between finance and the business. Finance can mean your accountant or bookkeeper when you’re small. Still, they need to be aware that they are taking on the additional role of planning and forecasting, not just historical accounting.
Communicating Frequently with Finance Staff
Finance is a flow of communication that happens across the business. It includes the functions of accounting, bookkeeping and modelling/forecasting, and it blends it, only sometimes successfully, with the business functions of operations, management, board, and HR. All of these disciplines need to come together for the business to fully capture where it’s at and where it’s going to have the best chance of success. If quality and reliable communications pathways to and from finance are not established, it can have catastrophic effects. We have heard of numerous instances of business decline due to known events being misrepresented or not passed on that caused founders to take drastic action, including not taking a salary. To help prevent these negative outcomes, businesses with successful finance teams and processes meet regularly to communicate the business’s ongoings. This includes anything that might have a material financial impact on the business like:
- A new customer or project.
- A new hire.
- Changes in salaries.
- Possible delay to a payment from one of your customers.
- Capital raise progress and timing.
- Sales pipeline progress. Separate out signed deals vs those still in progress (even if 90% progressed).
This is where numbers become more like art as hard numbers meet softer predictions. Additionally
- Regular updates become crucial.
- Having a board of events like Trello or even a document or spreadsheet to capture changes can be helpful.
- Make sure you are reviewing things together and that your financial control process is prioritised in your calendars.
Maintain a cash reserve to help guard against the unexpected
Running at zero is obviously not fun but can be the reality for many businesses. This is stressful and reactive, mainly because many use their cash balance as the trigger for whether they can pay their creditors. The most significant risk here is that an unexpected event occurs, and you’re unable to manage it, and your business’s solvency comes into question. To counter we recommend that businesses consider having:
- At least 3 months of cash runway for COVID-like instances and the unexpected.
- Access to a short-term credit facility lined up for use during emergencies.
If a sizable buffer looks unachievable, set yourself a goal as a business to build up that buffer over 12 months.
Reforecast regularly
And lastly, don’t etch your plans in stone and be done with them. Changes will occur almost instantly to whatever plan you’ve set, so adapt by regularly re-forecasting. 12 months is a reasonable forecast period, but 6 months should be the minimum so you can see a clear trajectory and appropriately manage the company’s cash. If you can’t see this number and cannot re-forecast quickly and easily, that’s a risk. Find a person or a tool that can help with this, or speak to us at Cashbucket; we’re happy to help.
Conclusion
No matter the size of your business or the industry it operates in, a solid financial control structure is vital to success. It’s the football goalkeeper equivalent of running a business. Often thankless when it does its job correctly but downright painful if it doesn’t. Likewise, working with finance can be intimidating. But just like anything you’re not used to, it’s essential to step outside your comfort zone to succeed. Work with finance early, and get accustomed to their methods—the alternative is awkwardness, miscommunication, and—ultimately—failure. The best companies are generally built in phases, one step at a time. And by applying this model, you can develop a steady and manageable pace of growth – not only avoiding a cash flow crisis along the way but also enabling you to put strategic plans into action before you need the money.
