Startup Financial Forecasting During a Crisis
Startups are in an interesting position during the current economic and health crisis. Some have recent fundraising to rely on. Some are in online or healthcare spaces, and have seen revenue increasing. And others were barely attracting revenue in the first place.
In all of these cases, they also tend to be innovative, fast-moving, and ready to test hypotheses. There’s no stock market to impress, and no huge board of governors that needs to sign off on decisions.
So when it comes to financial planning and cash flow optimization, they’re ready to make moves right away.
But how should smart startups plan for the murky future ahead? And what are some immediate ways to keep cash coming in, even if new business is slow?
In a recent virtual CFO Connect meetup, we asked two corporate financial coaches to share what they’re seeing from the companies they deal with, and their best practices.
About our speakers
Jana Scharfschwerdt is a CFO on-demand for startups and growing companies. She helps teams build and structure their finance departments, set foundations for growth, and particularly more recently has worked to steer companies through financial uncertainty.
Julius Bachmann is a Partner at founder coaching firm Volate, investor at Joyance Partners, and musician based in Berlin. He works intensively with entrepreneurs around Europe as a coach with a focus on personal growth, business strategy and finance.
Julius and Jana presented their framework for financial planning, and then took audience questions. You can watch the full replay of their conversation here:
Now, here are five of the biggest takeaways from this virtual CFO Connect meetup.
Forecasting conditions are far from ideal
Financial forecasts always rely on assumptions. But in turbulent times - including during a pandemic - we have limited ability to predict what’s coming next.
Which, as Jana explains, impacts your forecasts. “If I knew when a full economic recovery would occur, I’d have a very valuable report to share. Nobody actually knows for sure. Q2 will be a dark quarter for everybody, except those companies seeing direct benefits right now. You can probably write that quarter off completely.”
Julius agrees. “It's pretty hard to forecast around lockdowns. My personal expectation right now is that we'll probably have multiple lockdown periods because from all we know about previous epidemics or pandemics, there are multiple waves. I can only imagine that we will have a second or third wave of this and that the measures will be equally drastic.”
“And that would be the worst case planning that I would do, is multiple waves of lockdown. Maybe another two, three weeks in October or so and take that into effect. Maybe then the economic effect won't be as devastating because people will be prepared, but still, that would be the thinking that I would apply.”
As a result, both speakers advise companies to forecast for the worst. “Many companies, if not all of them, are currently optimizing on cash because there's so much uncertainty,” says Jana. “So it's actually good advice to plan for the worst of the worst. Plan cost cutting measures for the worst of the worst. And everything comes on top of it revenue wise is then a gift.”
Analyze your existing customer base
Businesses need practical steps they can take right now to improve their position. And Jana feels that your existing client base gives you good ground to stand on. “Browse through your current customer list, and identify the industries they’re in, the risks in their industries, who their clients are likely to be, and how they might be thinking about payment terms and cash cycle.”
“And then go further. When are some of these contracts in renewal and likely to churn? Which customers have the potential to be up-sold? Maybe you can cut a deal with them, rather than risk them not paying at all or churning because they go out of business. You may be able to support them and help them make it out of the crisis.”
This approach can have a hugely positive impact on revenue. As Julius explains, “It’s also important to work with your sales team and customers to establish discounts in order to incentivize staying with you, buying more, or paying earlier. It's effectively cash discounts for paying earlier but give your sales team the freedom to discount now in order to lock in revenue on your products.”
Focus on bringing cash into the business
Find ways to bring cash in early from existing customers, as above. But what other creative strategies can finance teams use to optimize revenue during this tricky period?
“There is obviously factoring,” says Julius, “which means financing your outstanding receivables. That optimizes the incoming end of your cash cycle. You can also look at supply chain financing if that is relevant in your business model, where you can finance your payables as well. Those are both pretty specific to certain business models.”
“Another option is if you are working with assets - if you’re a mobility provider, for example: sale and lease back is the word here (to get to liquidity). If you're actually producing company hardware or cosmetics or food, think about inventory financing and how to optimize your inventory for this crisis. Maybe not so much for perishable goods but if you're selling some form of circuits, electronics, or sensors that are then sold to clients.”
It’s important to be extra-vigilant here, says Jana. “Push hard on your receivables. Then check the ageing list of your receivables every week, and do a little work on invoice and cash collection. Make cash the number one priority.”
“Maybe you had some credit lines that you have untouched and unused. Call them in and renegotiate whenever possible, just to have a buffer, just to have your security net, just to have another island where you can land on if you need it.”
If you’re fundraising, close quickly
Some companies were in the process of raising funds when the current crisis hit. If that’s you, do what you can to close those rounds before the funds close up shop.
As an investor himself, Julius sees this particularly clearly. “I think seed pace and the size of rounds will slow down considerably. There's a few funds that have stated that they're not funding at the moment.”
“One general statement I can make about venture finance here is if you have commitments right now,close your round as soon as possible. Try to get that cash in and then use that in order to re-plan, because the funds as well work on their own contingency strategies and we see commitments being thought over with venture investors. And so use what you have right now. Take it and put it to use.”
Keep it simple
Both Julius and Jana feel that companies can overthink financial planning, and miss chances to test and iterate. As Jana puts it, “we all have the tendency when we’re in the flow of creating initiatives to over-engineer.”
So what’s the right level of detail to plan to, and what’s a good timeframe? “Enough time to gain data on (and have a chance to improve) on certain metrics, but short term enough that you can actually act upon it and reroute yourself.”
“Less is more from a usability standpoint. In my opinion, you need a maximum of five KPIs or metrics you want to optimize on. ”
“Same goes for initiative planning and OKR planning right now,” adds Julius. “Make it as simple as possible.”
Use this time to prepare for the future
Many companies are simply trying to stay afloat at the moment. As we’ve already seen, they need to focus on cash flow, call in a few debts, and probably make some difficult cuts.
Others have a little more wiggle room. Perhaps their revenue hasn’t taken a complete nosedive, or maybe they had a nice round of fundraising to rely on now.
For them, Julius proposes using this time wisely. “If optimizing for cash is not your first worry right now, you may be able to make investments right now. Do invest in ERP systems or CRM systems where you can increase efficiency and productivity in the future. That will pay off once we move into a more relaxed economic situation. Installing some discipline now is what makes a company successful later.”
“This is also where we look at the crisis in 2008, the crisis in 2001. This is what the winners did.”
Jana adds, “In busy times, you optimize top line, top line, top line. But eventually if top line is fine, and still looking good despite the COVID-19 situation, then you can improve your effectiveness measures. That's the best standpoint in order to get to a great valuation. You're going to be very strong afterwards.”
Move quickly, and plan to plan again
Throughout their conversation, Jana and Julius both emphasized the fact that financial planning is never a perfect science. Especially in the current conditions. Startups need to make the best assumptions they can, and then expect to update forecasts early and often.
Your best bets are to:
Plan for the worst, and hope to be pleasantly surprised
Looks for cash flow quick wins, including from clients, suppliers, and within your own inventory
Make short-term forecasts, and keep the number of variables to a minimum
Keep the company closely aligned on whatever the new goals are
This is a difficult period for the vast majority of companies and employees. Your ability to plan well - to envision the company you hope to see in the future - will see you in good shape on the other side.
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