In the world of venture capital, we are always talking about cash. You hear phrases like “cash burn,” “cash runway,” and “cash on hand” from investors and founders alike every day.
Despite all this talk of cash, early stage companies rarely research their inflows and outflows at a level that can unlock maximum efficiency. Why are they missing the boat? Because the concept of working capital is not as widely understood as it should be.
We believe that preparing a rolling 13-week cash flow forecast (or a longer timeline once you get started) can help you dig deeper into your finances and find hidden cash reserves. We encourage our portfolio companies to do this exercise in good times and bad and to always practice forecasting in times of uncertainty.
Creating a rolling cash flow forecast is the best tool you can have for understanding where your money is going, identifying savings opportunities, committing more money, and delaying outflows as much as possible.
Regardless of how far you’ve come with organic acquisition, now is the time to take a closer look at your paid acquisition and all marketing costs.
It’s like counting calories when you’re dieting – once you start paying close attention to empty calories, the little cheats here and there, you can see how they add up. Your company’s cash flow is no different.
Do this exercise with your entire management team and you will all understand how powerful detailed cash flow is. It can help you understand the fundamental drivers of your business. For the non-financial folks on your team, you can find online templates and YouTube videos to explain the concept of cash flow.
That said, there are no shortcuts. You must first make a forecast.
Create and leverage a cash flow forecast
First, document the weekly expected earnings (inflows) and any expected payouts (outflows). This is a cash-based forecast, so you need to project cash receipts based on the terms you have with your customers right now.
Don’t forget to adjust the timing. Be sure to factor in the customer who is remarkably slow to pay so that your forecast is both realistic and conservative. You can include in this inflow any capital increases you expect during this period. Again, be realistic.
Be sure to itemize all of your fixed costs (outflows), such as salary, principal or interest, rent, and insurance. Then describe your variable payments to suppliers, vendors, IT subscriptions, marketing costs, etc.
