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Sep 25B2B CFO

Cash Management after Closing a Round

Sep 25B2B CFO
Large Mountain Of Dollar Bills

So, you’ve recently raised funds for your company.  It’s a very exciting time.  Your vision and dedication have been rewarded.  It means that smart folks believed in your vision and are willing to bet on you and your team.  Of course, managing that cash presents a new set of challenges.  This may seem obvious, however, it’s only human nature to develop a false sense of security once you’ve raised the money.

You raised the money for specific purposes, and you’ll need to manage it efficiently.  While a good start for cash management is a financial model (something we love at B2B CFO), keep in mind that nobody has a perfect crystal ball, so you should set it up in a manner that allows the management team to easily create “what if” scenarios by including input variables around key drivers.

A few points on managing cash after a raise:

Gross versus Net:  If you are raising money, keep in mind that you’ll start with a little less that you’ve raised.  Legal fees are just one example of costs you’ve got to cover.

Avoid the false sense of security:  It may be natural to develop a false sense of security early on with the recent cash infusion.  This is not the time to play Santa Claus with the staff (or yourself!).  On the other hand, if your team has been working for pauper’s wages awaiting the financing, make good on your promises – but be sure to disclose such intentions in your business plan/prospectus.  Even though you’ve developed a forecast for a reasonable cash burn, it’s still surprising to watch the cash balance drop while growth plans are being executed.

Balance Optimism with Realism:  Optimism is a must for growing companies.  However, temper it and ensure that you’re also realistic.  Analyze the accuracy of sales forecasts.  Remember that a sale isn’t a sale until the check clears the bank.

Consider the bookings-to-cash cycle:  The sales pipeline is a good leading indicator of cash flow if you know how to convert a booking into cash. Once the product or service gets out the door, you’ll need to manage A/R and collections.  It sounds easy, but there’s a process for each step, and it requires discipline.

Early detection:  You need to spot issues early.  Addressing the root of issues can, and usually does, take time.  High quality analysis requires trustworthy and understandable information, which is derived from efficient and effective processes.  Get your data trends in order early.

Plan B and C:  This is a must – have a Plan B and C ready for what to do if you’re burning cash faster than expected.  If plan B is raising more money, you’ll need at least a 6-month head start.  Plan C may involve scaling the business back a bit (again, this doesn’t typically create instant results).  There’s no single right plan B or C, but you need to have a backup.

Develop good communications:  Setting aside any discussion about personalities and chemistry between the entrepreneur and the Board, at a minimum you need to be able to have quality discussions with investors, bankers, lenders, auditors, advisors, etc.  Trust will be the key factor in the event you need to ask later for a follow-on round or a bridge to a future event.

While the above points may seem a bit cynical, they actually share a theme about being realistic and careful. Clearly revenue can solve a lot of problems, so let’s hope your business will perform successfully to your plan, or even beat it.

photo credit: Money via photopin (license)

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