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Get a Handle on Your Ventures’ Cash Runway – FAST!

March 25, 2020

accountants working

Dennis Ensing

As mentioned in my last post [March 13 - A Reckoning is Near) cash preservation should be king right now for all companies, let alone angel-backed/cash burn start-ups. I spoke with an experienced CFO of a venture-backed company and we developed a battle plan for your ventures on which to model their contingency plan.

Regardless of how much cash is on your ventures’ accounts, check in with them (and their Boards) on the following:

  1. They must set up a monthly, and maybe even weekly, cash flow spreadsheet. It must be as detailed as possible to understand all inflows and outflows.

  2. Have them test the assumptions, then test them again.
    • In particular, for the inflows, realize that customers may stop and delay payments
    • Make assumptions around DSO (days sales outstanding) to flex the model
    • Do they deal with resellers or partners in general that operate on low margins? If so, they must consider ways to protect from the channel collecting cash from customers and then not remitting, delaying payments, or possibly declaring bankruptcy shortly thereafter
    • The venture’s CFO (or CEO if there isn’t one) must be in weekly if not daily accounts receivable meetings to review calls and responses and make sure the team is on top of this. Pull in team members from Accounting and Customer Service to help with these calls. Develop talk tracks

  3. Have they figured out and understood every dollar of discretionary spend, and thought through what they can delay until at least September?

  4. If they have revolving lines of credit, they should consider drawing on them before they need to. Most financing agreements will include provisions prohibiting a draw if you are or “know you will be” in a default when you draw. It would be best for them to speak with their FIs to let them know they are doing so out of an abundance of caution.

  5. Have an “all-hands” investor discussion with the CEO/CFO around a cash infusion if needed.
    • Management must have a plan around how they will be conserving cash and extending runway so that the discussion isn’t simply “we need the investors to inject funds.” What’s the company and founder’s appetite for dilution?
    • Some of this plan will be pretty straightforward:
      • Discretionary items pushed out
      • Marketing spend, in particular, is likely to fall on a lot of deaf ears right now and for the next 60 to 90 days
      • Implement a hiring freeze and hold off while the world is shut down if it makes sense for the business
      • Adding X days to accounts payables cadence
      • Reducing contractor/consulting spend
      • Delay raises
      • Delay bonus payments if they’re done quarterly
    • Then come the harder parts for them to consider and plan:
      • Accelerate low performer attrition. Develop the “who,” “when” & messaging so that this doesn’t seem like a RIF (“reduction in force.” – it isn’t, but it sure will be perceived that way. So the goal is to protect top performers who they need once this storm passes . . . and it will)
      • Are there teams or groups that in a complete shutdown simply won’t have work? Has management thought through what they can do here? Is a sabbatical or furlough an option?
      • What fat is there in the organizational structure? Now is the time to realize they can’t afford this. Again, develop the “who,” “when” & messaging.
      • What is the appetite for short term pay cuts to save headcount? A 15% to 20% reduction in pay for 3 to 6 months may be more palatable than a 15% to 20% reduction in staff. They should not be afraid to obtain team input.
      • They should be on top of government announcements for both workforce funding/salary top-up availability and also reduction regulations.

Management must avoid a “this won’t happen to us” mentality. Make sure you tell them that you don’t want to hear this because the reality is, no one knows. We’ve been hit with a black swan event. They must treat it as such.

It is possible the right decision is not to do anything now because they are not seeing enough of a short-term business impact – and there is enough of a war chest to weather some of the storm. But, having a plan of attack in place that can be executed on when/if needed gives everyone more comfort that management can be proactive with increasing levels of contingency/severity triggering appropriate actions.

Make sure management is coming to its Board with all of the ramifications. For example, if the plan involves cutting of headcount that are not productive now, but will be critical when this storm subsides, this is an important discussion to have and explore possible alternatives.

Everyone should understand as well that, while this is a spreadsheet exercise, your ventures’ people are not numbers. They have families. They have mortgages. How has management thought through this, as hard as it is? Make sure their head of HR/People have contributed substantially to the plan.

Management should also have a plan to address morale during all of this. This might seem like an oxymoron (improve morale while also reducing spend), but it is critical. Does the venture have the right programs in place for buddy systems and regular virtual social interaction? Is the CEO constantly messaging the teams, and being transparent as possible? Do they have mental health programs in place? Can they make some small monetary investments?

My CFO colleagues’ opinion is that 2008 will be seen as a walk in the park compared to what we are going through now. Entire countries, states and cities are shutting down. At this time, we are hoping that the closures will be no more than 1 or 2 quarters followed by a sharp recovery (unlike previous recessions like 2008 which have typically been longer in duration, albeit not as bad in impact). While this also seems to be what financial market experts are inferring, right now it’s really just a guess. Don’t let your ventures be unprepared.