Cash Management: How to forecast like a CFO

Cashflow management tips to help startups succeed

Thanks to Jana Kovacovska, founder of Tiny CFO for her brilliant post on forecasting for early stage startups who don’t yet have a finance hire. Read on 👇

It feels like every week I hear about a new cash flow forecasting tool. And don’t get me wrong, many of them do an excellent job helping you get on top of your finances. But they won’t tell you how to actually manage your cash. So what do you really need to know, and do, to make sure you have enough to thrive?

1. Know how often to look – and then actually do it

Cash flow forecast is only helpful if you actually look at it. Establish a frequency – if you’re fast growing, weekly; if you’re yet-to-be-fast-growing, monthly could be enough, book 15 minutes in your calendar, and spend that time figuring out how many weeks you have cash for. Write it down. Ideally, you’d have 24+ weeks at all times. That way, if something doesn’t go as planned, you have time to act before you run out.

2. Look at the trend

Yes, 24 weeks’ worth of cash is great, but watch out for any underlying trends too. If you had 30 weeks a month ago, then 24 weeks two weeks ago, and now you have 18, it is worth spending 30 minutes figuring out why. Is it because you’re not collecting revenue? Is it because revenue is not growing as fast as expected? Find your answer now – before it is too late. (Of course, this kind of trend is expected for pre-revenue startups that live off VC money for the time being. It’s even more important to be on top of this if you’re in that category.)

3. Act early

There are lots of things you can do when you know you may be running out of cash soon – but some of them take longer to implement. Whether it’s switching customers to annual plans paid upfront, raising another round, or postponing a hire by a month, it’s all a lot less stressful if you don’t need the results yesterday. If you have less than 6 months’ worth of cash, plan your next steps now.

4. Timing, timing, timing

Founders often assume that cash flow management is about how much you spend versus how much you bring in. Actually, it’s also about when. Let’s use a personal finance example – if your rent is due five days before you get paid, and you don’t have any savings, it’s very stressful – even if said rent is much lower than the expected salary. Often, wonders can be done for your cash flow just by moving things around a bit. So think timing, rather than just total amounts.

If you assume $10K monthly burn, a $20K legal bill throws it off by quite a bit

5. Don’t assume constant monthly burn

Conventional wisdom goes, whatever you have in the bank divided by your monthly burn equals your runway. And that is true, if you spend about the same every month. However, we don’t see that often with early stage companies. Usually, burn is increasing over time (mostly because of hiring), and also has one-off spikes when a company needs to spend a bit on branding, IP protection, and similar things. Obviously, if you assume $10K monthly burn, a $20K legal bill throws it off by quite a bit. So make sure to plan for these expenses, especially the ones that you expect in the next 6 months.

6. Garbage in… you know this one

If you’re using an automated cash forecasting tool, make sure that you understand how it pulls its figures – and roughly what level of accuracy you can expect. Sometimes, these tools use your accounting data – so it needs to be up-to-date for them to work correctly. Other times, they assume a constant monthly burn (see the previous point). As they say, garbage in, garbage out – so whatever tool you use, feed it the good stuff. Alternatively, a humble spreadsheet may be perfectly fit for purpose, no need to overcomplicate things unnecessarily.

7. If you have too much cash

I’m so glad you’re in this position! Well done! But beware – you and your team may be tempted to spend it on nonsense. And nonsense snowballs as it’s hard to inject frugality in a business where nobody has been worried about costs for years. Instead, have a think about what constitutes money well spent and how you assess return on investment. A quick and easy ROI framework that everyone in the company can understand – whether it’s for assessing experimental marketing spend or for investing in people – usually works best, and can save millions, if not billions, later.

It’s hard to inject frugality in a business where nobody has been worried about costs for years

Cash flow management is like a muscle that you train as you go. Just like skipping the gym once every couple of months isn’t the end of the world if you’re trying to stay fit, neither is slightly imperfect cash flow management if you want your company to do well financially. Just make sure you don’t ignore exercise altogether.

Jana Kovacovska is the founder of Tiny CFO , bringing actionable strategic finance to early stage startups who don’t yet have a finance hire.

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