In the world of venture capital, we’re always talking about cash. You hear phrases like “cash burn,” “cash runway” and “cash on hand” every day from investors and founders alike.
Despite all this talk about cash, early-stage companies rarely scrutinize their inflows and outflows at a level that can unlock peak efficiency. Why are they missing the boat? Because the concept of working capital is not as widely understood as it should be.
We believe that building a rolling 13-week cash flow forecast (or a longer timeline once you get going) can help you dig deeper into your finances and find hidden cash reserves. We encourage our portfolio companies to do this exercise in good times and in bad and to always practice forecasting in times of uncertainty.
Building a rolling cash flow forecast is the single best tool you can have to understand where your cash is going, identify savings opportunities, capture more cash and defer outflows as much as possible.
Regardless of how far you’ve come with organic acquisition, now is the time to scrutinize your paid acquisition and all marketing expenses.
It’s like counting calories when you’re on a diet — once you start to pay close attention to empty calories, the little cheats here and there, you can see how they add up. Your company’s cash flow is no different.
Commit to this exercise with your entire management team, and you will all understand just how powerful detailed cash flow is. It can help you understand the fundamental drivers of your business. For the non-finance folks on your team, you can find templates online and YouTube videos to help explain the concept of cash flow.
That said, there are no shortcuts. You must build a forecast first.
Building and leveraging a cash-flow forecast
First, document weekly projected revenue (inflows) and all projected disbursements (outflows). This is a cash-basis forecast, so you need to project cash receipts, which will be based on the terms you have now with your customers.
Remember to adjust for timing. Make sure you account for the customer who is notably slow to pay so your forecast is both realistic and conservative. You can include in these inflows any capital raises that you anticipate in this time period. Again, be realistic.
Be sure to itemize all of your fixed costs (outflows), such as payroll, principal or interest due, rent and insurance. Then, detail your variable payments to suppliers, vendors, IT subscriptions, marketing costs, etc.