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Planning the Next 6 to 12 Months

  • Posted by Jordan Posell
  • July 14, 2020
Cyber threats

As businesses navigate a post-pandemic world, they're going to face many new challenges. Few companies, if any, will have the same working and customer service practices as six months ago.

It is not business as usual. We have emerged from lockdown into uncharted terriritory.

To ensure the ongoing success and growth of your venture, you must plan for short-term disruption. Careful planning of the next year of operations will make sure your business is not one of the 7.5 million at risk of closing for good.

To help your business survive, perhaps even thrive, there are four major financial considerations for your business continuity plan:

  • Cash flow
  • Short-term liquidity
  • Burn rate
  • Runway

Each of these figures will help you stretch your cash and give the best chance of coming out on top in the next year.

Metrics Matter More Than Ever

Keeping an eye on these key metrics has always been good practice. But with the added uncertainty in the market, it’s now non-negotiable. Revenue, costs and productivity are all likely changed now. 

Key point: If you want to plan through the next year, audit and monitor your critical metrics — beginning immediately.

Key financial metrics that can determine the difference between survival and demise should include gross margin, overall profitability, days sales outstanding (A/R), days payable outstanding (A/P), inventory weeks on hand, and % of revenues invested as R&D.  Optimization of each of these can extend your runway by months.

Additionally, optimization of customer economics such as CAC (cost of acquisition), churn, average revenue per customer, and average order value can make significant improvements in the overall financial health of your business, helping improve cash flow and runway substantially.

Figure out and track cash flow

Statistic: A US Bank study found that more than 8 in 10 failed businesses said cash flow problems were at least part of their failure.

Cash flow is typically summarized in a cash flow statement. This statement is not a balance sheet or revenue report, but is used in conjunction with these financial reports (and others) for business accounting and decision making.

Tracking how much cash flow isn’t simply making note of sales and expenses. A number of other factors means that you have more or less cash flow in your business. 

Factors that often affect cash flow include:

  • Growth: Proper growth requires planning and equity to hire, acquire new customers, build new products and set up supply channels. This all (mostly) happens before new revenue starts rolling in to the bank.
  • Inventory: Bulk inventory orders, hiring extra developers to hone in a new software product and other “up front” costs change cash flow in ways that may hit your bank balance in ways not shown on your P&L.
  • Collections: Billing clients is one thing, but receiving the funds fully and timely can be another.  Make sure you are being paid by customers!
  • Vendor billing: Some vendors send regular invoices and become a predictable monthly line item. Other times, bulk invoices take a sporadic and large chunk out of your finances — causing problems.

Better managing cash flow comes down to taking steps to ensure:

  • Prices include all factors, including time, effort and potential contractor/vendor costs with a reasonable margin left over.
  • You’re using projections to accurately estimate ALL cash flows (in, out, P&L, balance sheet) over time and reconciling it with your weekly/monthly cash flow statements.
  • Correcting mistakes in your products and processes as you go, to reduce unexpected cash flow issues in the future.

Key action: Create, or work with a solid financial services company and get an accurate bearing on cash flow — with regular updates. Course-correct as needed.

Improve short-term liquidity

If you’re an ecommerce brand ordering your inventory from an overseas supplier, things can get dicey. Tie up too much in inventory, maybe you can’t run the ads necessary to sell your stock. Or run out of items, without enough cash for a shipment, and there goes your revenue. 

In economically-challenged times, these are just a couple of examples highlighting the need for liquidity. You need a level of cash that:

  • Ensures you run “business as normal” for the next few quarters.
  • Isn’t too much that it disrupts normal business. For instance, you’re sitting on $50,000 in cash, but are still too scared to make an order and the warehouse is getting thin.
  • Puts you in an ideal position to fully take advantage of economic recovery — as it happens.

Have a service that hasn’t hit profitability yet? Stop the ads and either keep the cash or invest it in ads to your top money-making services. If you’ve made hires to facilitate growth at a late 2019 level, it may be the time to furlough or layoff (unless you’ve taken part in the PPP program).

Additionally, short-term liquidity can be vastly improved by accessing working capital lines, the aforementioned PPP program (or other disaster loans), bridge loans from current investors, and/or formulaic debt programs from companies such as Clearbanc, Lighter Capital, and even Intuit.

Key action: Sit down and think, where does the money sit (payroll, equipment, inventory, recurring costs, etc.)? How long will it take to turn it into liquid cash? Then, formulate the plan to get it into your accounts.  Also, look at bringing in short-term capital from various sources.

Understand and cut the burn rate

Burn rate is how quickly you’re burning through investment cash. It’s a number pertaining mostly to startups who have received some form of funding — and likely have little or no profit.

If you’re in this position, you’ve likely thought about a couple of things:

  1. How long will my current cash last in the current conditions?
  2. Is it going to be more difficult to find additional funding?

These are great, and simultaneously scary, questions to ponder. How long you’ll last is the runway, which is covered in the next segment. Burn rate is how quickly your available cash is running out. 

If you have $250,000 in funding left in the bank now, but three months ago there was $350,000 — the burn rate is more than $33,000 each month.  While it is a basic exercise to understand the dollar amount of your burn rate, it is harder but much more valuable to analyze the components of the cash burn in recent months.  

More difficult and even more valuable is projecting out those components in future months, but it’s vital and could be the most important thing you do to ensure your business’ survival.  Review every component of cash burn in the last 3 months and project out each of them going forward.  What will change?  What will remain constant?  Can any be reduced?  Can any be delayed?

Once you have a clear picture of your cash burn for the coming 6-12 months, map it out against current cash.  Do you have enough runway to last through continued uncertain times?  When do you expect to received further funding or increased revenues or short term liquidity? 

Key action: Map it out and, in detail, calculate your cash burn rate. List every single one of your expenses. Cut wherever possible.  Stretch wherever possible.  Make sure your projections show survival -- if they don’t, either raise more funds or go back to your plan and revise further until they do.

Extend the runway 

Tracking cash flow, increasing liquid funds and reducing burn rate are all part of extending your company’s runway. Runway is how long your business can run before running out of operating cash (either revenue or investments funds).

Example: A software startup has 1,000 paying users at $100/month, equaling $100,000/month in revenue. They also have $1,000,000 in investment funds.

Before the economic downturn, the company was in serious growth mode spending. The burn rate is $250,000 per month in developer, marketing and customer service salaries and other expenses.

If this company keeps the same number of users and doesn’t receive new funding — they have a bit over 6 months worth of runway.

Here’s a crude, but effective look at this playing out:

  • Month 1: $1,000,000 (cash) + $100,000 (revenue) - $250,000 (expenses) = $850,000
  • Month 2: $850,000 (cash)  + $100,000 (revenue) - $250,000 (expenses) = $700,000
  • Month 3: $700,000 (cash) + $100,000 (revenue) - $250,000 (expenses) = $550,000
  • Month 4: $550,000 (cash) + $100,000 (revenue) - $250,000 (expenses) = $400,000
  • Month 5: $400,000 (cash) + $100,000 (revenue) - $250,000 (expenses) = $250,000
  • Month 6: $250,000 (cash) + $100,000 (revenue) - $250,000 (expenses) = $100,000

At the six month mark, the company can no longer function in its current position.

Plan the Next 6 to 12 Months to Survive and Thrive 

Figure out your cash flow and monitor it regularly, preferably with reliable accounting help for consistent tracking and accurate figures. 

Then, improve liquidity and reduce the burn rate as soon as possible. 

Finally, figure out your runway to better make decisions on finding more funding or quickly becoming more profitable.If you need a financial partner to help with projections and financial planning, contact us at Full Stack Finance and we can help.

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