I am currently working with 3 clients whereby cash is going to get a little tight over the next couple of months as they're in middle of their fundraise.

Sometimes cash flow can get a bit tight, just before a fundraise, whether that be debt or equity, particularly now in 2023-2024 when it's harder to raise funds. Back in 2021, this was less of an issue as you were able to raise cash quite quickly. A fundraise only took about three months.  Now it's taking twice as long.

Even with the best planning in the world, you may find that there's real challenges with managing your cash flow during the fundraise period, short term.  Ideally, you want the cash runway to be around 6-12 months long before starting a fundraise, but it doesn't always work out that way.  

A number of reasons can change this.  For example, a lead investor may pull out at the last minute and the fundraise process has to start from scratch.  Commercially, a key partnership deal has been cancelled or delayed.  Or even, the KPIs the business want to hit before going to market took a little longer than originally planned.  In the start-up world not a lot goes to according to plan and so finance leaders need tools and strategies to deal with these situations.

I use two types of cashflow forecasting when looking at cash runway, and managing short-term cashflow issues and scenarios.  I have made these two templates available to you here.

Below I've also posted the video whereby I go through these templates in a lot of detail, so you can see how I manage these practically.

The first step is a monthly cash flow statement, which you may already be very familiar with as you may have this within your budget and forecast.  I prefer using the indirect method, you can use direct method, it doesn't matter. This is just my preference.

If finances are getting pretty tight, I would highly recommend doing a rolling forecast or a live forecast model.  You will have your budget that you report to the board with. However, particularly with start-ups and scale ups, I like to do a rolling forecast as well, as it helps manage cash flows. I always actualise the the cash flow statement and then see how the cash flow, at a high level, results are.  The longer term cash runway or rather, how many months are in the black.

This view, in general, gives the business time to plan, change some commercial parts of the business or look at other forms of capital. This is what a finance leader will be doing on a monthly basis. 

However, its worth highlighting that this is a high level budget and if there is a month or two that gets very close to 0 or fact tips over to the red, then a detailed cash forecast is warranted.  It's worth remembering that the high level cashflow forecast could be plus or minus 10%.  Also, if you're planning on closing a fundraise in, for example, September you probably won't get the monies until October, or even November. So potentially, you need to as it as early as possible, manage your working capital, so that you can last until the end of October. As the most important transaction that you do every single month is payroll, you want to ensure that you have enough to pay for payroll until the end of October, at least, at a minimum, and without breaching any covenants if you have any, or ruining any key supplier relationships.

So this is why whenever we get into this kind of situation, we would do a much more detailed cash flow forecast just for those tricky periods. And it's usually for around three to four months.

This detailed forecast is on a weekly basis - so you can see how it all moves in much more detail. I generally include a more conservative view on incomings and outgoings.  This then gives us an opportunity to work out what payments we can hold back, which suppliers (or tax departments) we can call to negotiate payment terms and whether we need to improve the incomings through upfront payments via discounting or pushing to get a deal done in time.

As well as the "business as usual", its also worth highlighting that within the budget, there are certain deals or projects that the business wants to do. So whether that is higher conversion, landing a new partnership, or a new customer, getting paid in R&D tax credits, cutting certain costs, then include these as a separate section. By separating out scenarios, as it's often aspirational & working very closely with the founder on this - it gives a better view of what needs to happen to get a certain result and what the worst case scenario is. I generally review this weekly and then discuss with the founder on a weekly or bi-weekly basis.  Also worthwhile going through this at a high level with the leadership team, because they're the ones that can help you push things out and bring things forward. 

Ideally, you want to have at least six months runway while fundraising, but sometimes it just doesn't happen. If that's the case, and it's looking tight, I would also highly recommend looking for Plan B's as well, so bridging loans, short term loans, or revenue loans. So that if push comes to shove, and working with your working capital to extend your runway, you might get one to two months. But if that's not enough, you need a plan B. So line up your plan B when it's getting this tight, again, ideally, you want better long term planning, but just sometimes things just don't work like this in start-up world.

To see a much more detailed and practical overview of how I use these templates, than please click on the video below.

Links:

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