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Cash is queen: 5 reasons why companies that don’t prioritize cash fail

Alejandra Buentello
Alejandra Buentello CFO Connect

Silicon Valley Bank’s collapse, and the ensuing chaos, is an extreme example of how vulnerable some companies are to failure if they’re not properly managing their cash.

So what can you do to mitigate risk and avoid cash flow-related emergencies? CFO Connect recently hosted a webinar with two finance experts in order to discuss how companies can better manage and optimize their cash flow. 

This article will cover the highlights of the cash management webinar, but you can also watch it in its entirety here:

About the experts

Joyce Mackenzie Liu is the CEO and founder of Pegafund, which provides fractional CFO services to high-growth SaaS businesses, and overall C-level business-wide training on SaaS and growth finance.

Theresa Yu is an entrepreneur, consultant, and chartered professional accountant. She’s spent over 15 years advising and working with startup and high-growth companies in the tech and SaaS sectors.

These two finance leaders kindly lent their time to the CFO Connect community to share their cash flow expertise and best practices to mitigate risk.

Why is cash so important?

“Cash is the lifeblood of your business.” - Theresa Yu

Theresa’s words ring all too true, especially today. “You can be profitable on paper and still have a negative cash flow. We all have an awareness of proper cash hygiene, but it’s not something we often take the time to stop and assess.”

“You need to know if you have cash risk, and mitigate it in advance. The recent collapse of Silicon Valley Bank and even Credit Suisse really hammered the message home for a lot of companies.” 

Hear it loud and clear: don’t let your cash management fall to the wayside. 

What mistakes do companies make when it comes to cash management?

Theresa has five main reasons why companies fail due to poor cash management:

  1. Businesses fail to assess their processes

“Even the best cash flow management isn’t going to help you if your business fundamentals are out of whack.” 

In other words, you need to have a good handle on your business’s unit economics and an accurate understanding of your cash burn and runway. 

Theresa says: “It’s common in high-growth companies to focus on the scale of your services and product, and not invest the time to ensure that your financial processes have caught up. But I recommend that you set time aside, even on an annual basis, to evaluate the sufficiency of your financial processes.”

She suggests focusing on your company’s financial close process. “Your financials should be that single repository, one source of truth for your company.”

This source of truth will give you an honest snapshot of where you stand. This allows you to find opportunities and mitigate risk before a crisis situation arises.

Prioritize a timely monthly close, which is the perfect opportunity to evaluate that honest snapshot.

  1. Businesses don’t forecast their future cash inflows and outflows

Does your business do short-term and medium-term cash forecasts on a regular basis?

“A lot of high-growth companies are focused on the P&L and especially the sales targets they’ve disclosed to the board. There may be a complacency that comes with a Series B or Series C funding, or once they’ve achieved a certain level of profitability. You might think that cash management isn’t an issue. But even a profitable company that has financing should do a short-term cash flow forecast and review it weekly.”

Theresa’s best practice tips:

  • Do a weekly rolling cash forecast every 6 to 8 weeks, and

  • Do a monthly forecast every 12 to 18 months

These cash flow projects will lead to helpful insights, such as:

  • Are you overspending or underspending in certain areas?

  • Do you have a comfortable cash cushion, or is there danger ahead?

Answering these questions will help you stay (or get back) on track with your cash flow management.

  1. Businesses don’t optimize their cash inflows and outflows

In other words, businesses poorly manage their working capital

How do you optimize your working capital? Theresa walks us through the steps to take, and crucial questions to answer:

Speed up your cash in: are you invoicing customers on a timely basis? How quickly do you collect? How do you chase late payments? Is it automated, or manual? Or is nobody monitoring it? Does it make sense to offer customers discounts to pay early? Should you start charging interest on late payments?

Slow down your cash out: are you paying invoices back before they’re due? Are you incurring late fees on your invoices because you don’t have an automated system? Can you consolidate suppliers in order to negotiate discounts? Is all of your business spend appropriate? Are you controlling your company’s credit card spend?

Continuously monitor your cash inflows and outflows: pull weekly accounts receivable and accounts payable aging reports, and review them. How does this impact your 6-8 week cash forecast?

To better optimize your cash inflows and outflows, Theresa suggests calculating or assessing your company’s cash conversion cycle: “The lower your cash conversion cycle, the better your business’s cash-generating position.”

She continues: “Knowing how long it takes your business to pull cash in versus push cash out is critical. It can help you optimize your cash flow situation and even potentially become a competitive advantage.”

  1. Businesses don’t consider financing needs in advance

“You must plan your financing needs in advance, not during a crisis situation when bankers might be nervous to lend.”

Don’t let one surprise transaction be the straw that breaks the camel’s back. If you’re not closely managing your cash, one huge deposit that goes through in the same week that payroll goes out could cause chaos. You’ll need to take a couple days to move cash around and fund the bank account that’s in an overdraft position. Then you’re stuck and unable to process any more transactions. 

Looking ahead and anticipating these types of problems will make a huge difference. 

Theresa concludes: “Be strategic and apply for a line of credit before you need it. Qualifying for a line of credit is much easier when you’re in good financial health. Banks will be more willing to approve you, and they'll give you a better rate.”

  1. Businesses don’t have a contingency plan for crunch time

Theresa uses the recent collapse of SVB as an example for a hypothetical crunch-time situation:

“Let’s say a company banks with SVB. They wake up one morning and realize they don’t have access to any of their funds. What are some crunch-time levers they could employ?

  • Offer some big discounts to generate quick sales and cash inflows

  • Go to your accounts receivable outstanding and offer some of your customers an incentive to pay early or prepay, in order to get some cash in

  • Negotiate with suppliers or landlord for extra time to pay bills

  • Offer to consolidate SaaS tools and vendors to get additional rebates and discounts

  • Amongst the founders, C-suite, and investors, find out who would be committed to contribute (and how much) should a sudden cash crunch arise

You must have a contingency plan in place with the founders and management team in advance of a crisis situation.”

Audience Q&A and more insights

The webinar continued with more great tips and information about cash management from Theresa and Joyce, plus a lengthy question and answer session. The audience members asked questions about:

  • Long-term vs. short-term cash management strategies

  • Theresa and Joyce’s preferred cash management toolstack

  • SaaS-specific insights for cash management

  • And more!

Watch the full video for the answers to these questions plus more insights on cash management.

Thanks so much to our experts Theresa and Joyce for taking the time to share their wisdom and expertise with the CFO Connect community.

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