Why Cash is King

Whether you are a start-up struggling to raise capital to get you to that next milestone or a small business that has hit a rough patch, ensuring adequate cash reserves and runway is critical to staying alive.

I have yet to work with or consult for a company that didn’t have financial constraints. It is something that affects every Founder, Owner, and CEO. They are constantly having to consider the question of when and how to manage these limited and valuable resources so that they can not only keep the business afloat but also grow and scale it in a smart and sustainable way.

In good times, these choices are difficult. In tougher times, when your customers might be scaling back or your ability to raise capital just got harder, these choices are make or break. Staying alive through these tough times is a business owner’s number one priority. Using your hard-built cash reserves wisely is number two.

You should be evaluating your financial projections, cash reserve strategy, and contingency plans whenever you have a strategic shift, major market change, or every 6 months, whichever comes sooner. The next time you do your evaluation, consider the following.

Play the Pessimist.

Business owners tend to be optimists – they have to be to make the leaps of faith necessary to start and run new companies. At times, this optimism can be their downfall. Too many businesses focus solely on the growth levers that can propel their business and find themselves tripping over the land mines that could kill their business:

  • Loss of a single, large customer.

  • Unplanned cost/loss of labor and materials.

  • Regulatory and governmental changes.

  • Worsening economic conditions.

To mitigate this risk, take a hard look at your projections, burn rates, and other factors and assumptions built into your financial models. Apply some sensitivity analysis to see how you would fare if some of these risks were realized.

  • What would your plan look like to go for an entire year with no revenues and still survive? Where would you cut costs?

  • How much of a cash buffer or reserve do you need in these different scenarios?

  • What would your contingency plans need to look like then?

Rethink Your Cash Strategy

Conventional wisdom says that post-revenue small businesses should have 3-6 months of operating capital in reserve. With today’s uncertain climate, owners should consider whether more is better.

"Successful companies have three to ten times the cash on their balance sheets as their peers even when they are very small" – Jim Collins

Your strategy depends on your type of business and how quickly you can adjust to navigate any downturns or quickly capitalize on new opportunities. For example, professional services firms might be able to pivot with less than a brick-and-mortar retail operation since they could more quickly adjust their main cost driver – labor.

For pre-revenue and early-stage start-ups who rely on capital raises to sustain their business, the current thinking is evolving.  Since capital is getting more expensive and is taking longer to secure, businesses should push cash runways to cover 24-36 months.

38% of startups fail because they run out of money.

More and more, investors are looking at cash on hand and runway as key KPIs for small businesses and companies that don’t have a strong handle on their financial and cash management are at a disadvantage.

https://www.aumni.fund/blog/kpis-across-stages

Improve Cash Management

One action that you can take now - in addition to setting aside a percentage of your revenues for reserves - is to improve your cash management. Nothing hurts your reputation faster than not paying bills on time, and nothing stalls growth like not having enough on hand to capitalize on opportunities.

  • Diversify banking to mitigate risks and optimize returns, credit, and relationships. Don’t underestimate the importance of a strong relationship with your banker (or bankers – remember SVB?). If you don’t already have one, start now. Traditional banking can be the lifesaver for when you need a new line of credit to cover payroll or cash to buy inventory and the best time to ask for it is before you need it.

  • Optimize payable and receivable terms and channels to improve cash flow and increase available funds. It never hurts to ask for a two-week swing in your favor, especially if you have a solid relationship and past performance to lean on. I am always impressed by how many larger businesses are willing to extend better terms to their small business partners and that extra time can be your lifeline.

Seek Opportunities

Having cash reserves doesn’t mean that money can't also work for you. Consider opportunities to pay down debt, invest in interest-bearing accounts (as long as they are liquid enough to serve your needs), or make some strategic investments that will bring in needed capital. Can you wisely use some of your cash to:

  • Engage with your customer base to build stronger relationships and better understand what they are prioritizing?

  • Identify a defined market segment where you can easily scale?

  • Accelerate a new product or offering to market to create a new revenue stream?

  • Build up inventory in advance of changing market conditions that might increase costs?

There is no secret formula for what will work for your particular business. What really matters is that you create a clear strategy, take the time to consistently evaluate it, and seek independent assessors to help you avoid your own biases.

Barbara White