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June 22, 2023

Conquering a Cash Crunch: 5 Cash Flow Management Strategies to Extend Runway

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During downturns and recessions, companies may find themselves in a serious cash flow crunch: revenues shrink, expenses stay the same, and the end of their runway approaches fast. It’s an all-hands-on-deck situation that I know all too well from a prior investment role, where I helped create and implement an action plan to remediate an established company’s cash flow emergency.

These situations call for decisive action to conserve cash, but the execution requires close collaboration among company leadership, senior management, the board, and outside advisors (I wasn’t kidding about all hands on deck). Having all key stakeholders involved allowed you to “measure twice, cut once” and avoid the damage that implementing cash-conservation measures multiple times can cause.

In this blog, I share the best practices I learned from that experience. At a high level, they fall into five critical steps:

  1. Managing employee-related expenses
  2. Reining in non-employee-related expenses
  3. Spurring sales growth and retaining customers
  4. Establishing financial reporting systems
  5. Building company-wide buy-in

1. Get Intimately Familiar with Payroll and Other Employee-Related Expenses

Freeze hiring and emphasize internal promotions

Perhaps the most obvious action is to freeze hiring. This will prevent any growth in payroll and save on recruiting. It will also contribute toward the goal of virtually every company leader: avoid layoffs. Hiring freezes also can provide a morale boost by emphasizing internal promotions in place of outside hires. Freezing hiring can have a double savings effect if you are using recruiters who will no longer require payment of a retainer or a success fee.

Know your payroll timing inside and out

Payroll is one of a company’s largest outflows, so it’s important you have a handle on the timing of these expenditures – as delays or missed payroll can have massive legal ramifications. Keep in mind that changes in headcount are never immediate and may come with severance consequences. In a cash crunch, understanding the timing of these outflows is your number one priority.

“Payroll is one of a company’s largest outflows. Understanding the cadence of both income and expenditures is key to managing cash.”

Manage related expenses to minimize stress on cash flow

There are several payroll-related expenditures that go to parties other than employees. This includes payroll taxes, 401(k) contributions, benefits, bonuses, and fees. At a minimum, you should know the amounts for each expenditure and the deadline(s) by which they are required.

Bottom line: employee expenses are generally the largest cash outflow for companies, cannot be missed or delayed, are slow to reflect headcount change, and often go beyond the payroll outflow. Know the cadence of these outflows above all else.

2. Rein In Non-Employee-Related Expenses — and Know the Billing Dates

In a cash crunch, don’t forget to pare back or eliminate those off-site retreats, holiday parties, and team-building outings that are not a necessity. (Last thing to cut: programs, incentives, and rewards that directly impact sales.)

Identify mission-critical vendors, equipment and software

Payments to outside parties come in varying amounts and with different levels of criticality to the business. Your first step is to identify which vendors, equipment, and software are key to business operations and cannot be removed. Then, understand the timing for each payment, and whether any adjustments are possible. For example, are you maximizing net-30-day payment windows? Then, identify the dates of large annual renewals such as your Salesforce license, other SaaS or cloud-based applications, web-hosting service, or analyst subscriptions.

Remove unneeded or underused software expenditures

Once you have cataloged these costs, review them unflinchingly to weed out any duplicates or identify software that is unneeded or underused. If you expect your headcount to remain flat or possibly decrease, then freeze or reduce seat-based software licenses. Be mindful that many annual licenses may have been prepaid or are difficult to get out of prior to renewal. However, at renewal, there can be opportunities to review usage metrics and pare back licenses, evaluate cheaper alternatives, or push for discounts.

Consolidate vendors and reduce or freeze using consultants

The same analytic process can be applied to vendors, consultants, and part-time contractors. Look for duplications or overlaps, as well as contracts that have outlived their usefulness or completed their purpose.

Take another look at expenses predicated on expected growth

Another category of spending that requires scrutiny is investments or expenses predicated on expected growth. It’s likely your current budget was approved six or nine months ago when conditions were very different. Your planning assumptions regarding market growth, customer demand, cost of goods sold, and pricing leverage are likely no longer valid. You may need to ratchet down plans for, say, customer services, third-party software expenses, or hosting fees predicated on a higher budgeted sales figure.

Don’t hit pause on your R&D efforts without some analysis

Many of the actions we’ve discussed are relatively easy. Here’s one that’s harder: R&D spending. For most companies, a flow of new or enhanced products is essential for growth and competitiveness in the long run. Cuts in R&D may help reduce cash needs in the next quarter or two, but at what long-term cost? Will you be caught flat-footed when the market rebounds, customers are ready to upgrade, and competitors are launching new offerings? Obviously, you don’t want that to happen, so investment in R&D must continue to some extent but requires new prioritization. No function can be totally immune from reductions if the company’s cash situation is near a state of crisis.

“Cuts in R&D may help reduce cash needs in the next quarter or two, but at what long-term cost?”

Our recommendation is to carefully weigh the cost, personnel required, timeline to market, expected ROI, and mission criticality of the R&D roadmap and adjust accordingly. Can some projects with a long time horizon be left to “simmer,” allowing work to continue at a slower pace but with a quick ramp-up when conditions improve? On the other hand, what projects or features have a high degree of customer buy-in and could generate immediate upsell or mitigate churn risks? Identify which improvements are a must-have and which are a nice-to-have.

3. Retain the Customers You Do Have, Spur Growth Where You Can

So far, we have looked at options for reducing cash outlays. You must also pay attention to the other side of the equation: increasing revenue. Now, you may say, “If increasing revenue really were possible, we wouldn’t be in a cash flow crisis.” Not entirely true. There are several actions you can take to boost sales on the margin.

Focus on Renewals and Upselling

Renewals should be treated as the “lifeblood” of the company at all times, but especially during a cash crunch. Churn will only magnify the problem, and customer renewal efforts should be of paramount importance – they provide the “gas” to keep the car running, even if it is on a slower road. These renewal conversations should be happening early and often, to reduce the possibility of surprises and increase the potential to save any distressed accounts.

It’s also most likely true that your best chance for a new sale is from an existing customer and that it may be both a faster and easier sale. Depending on exactly what your product or service is, there are a variety of options for incremental revenues. For example, you may be able to offer add-on modules, upgrades, or replacements – possibly with incentive pricing or through product bundling. Often, simply emphasizing deeper conversations during renewals (as opposed to an auto-renewal) can illuminate customer pain points other modules might easily address as an upsell.

Some products are naturals for support services – such as consulting or maintenance – which customers may not previously have signed up for. You also might offer incentives for purchasing a longer-term contract (e.g., two or three years, versus one) or prepayment in advance.

Migrate primary account contact from sales to customer success

Here’s a suggestion we found works well: migrate the primary contact for existing accounts from Sales to Customer Success. There are two main reasons for this. First, Customer Success is probably more familiar with the customer’s day-to-day use of the product, which puts them in the best position to pursue upselling. Second, it frees the sales team to concentrate on prospecting and cultivating potential new accounts

Manage inflow timing

Essential to any effort aimed at cash flows related to the customer base is keeping a close eye on the timing of payments. You need to track this customer-by-customer, product-by-product, and module-by-module (particularly if customers with multiple products are not co-termed). Understand when payments are contractually due and ensure that the accounts receivable teams make proactive outreach and don’t let customer payments turn into accounts receivable.

4. Unite Data From Across Your Financial Reporting Systems

Forecast cash flows using all data available to you

Forecasting cash flow is complex, requiring coordination of multiple systems and sources of data. For starters, you need data on payroll, taxes, withholding, benefits, AR/AP, and historical bank data. Each of these heavily impacts your cash flow calculations. Your goal is to ensure the accuracy of cash flow forecasts by maintaining a unified, easily accessible repository of all relevant sources of data. Don’t just look at current numbers. Historical data from bank reports will help you understand the cadence of your expenditures.

“Your goal is to ensure the accuracy of cash flow forecasts by maintaining a unified, easily accessible repository of all relevant sources of data.”

Make informed decisions with high-quality data

With a reliable forecast, multiple action steps can be employed, such as renegotiating payment terms, stretching out AP, pulling in AR, ensuring cash availability for all payroll-related costs, and creating proactive plans for renewals and upselling.

5. Create Company-Wide Buy-In

It can be tempting to try to effect these changes behind the scenes and leave it all up to the “bean-counters,” but in our experience transparency is a key to success. This starts with shared commitment across the first two levels of management (director to C-suite). Employees appreciate transparency and are more likely to help proactively when this is delivered as a team effort.

Those on the frontlines of managing cash (primarily finance, CS, A/R) need to have the highest level of buy-in. This includes the leaders of each team who will feel the brunt of hiring freezes and conservative management of their departmental P&L. Regular updates to show progress and demonstrate the impact of cash-conservation efforts will help everyone see that there is a real impact.

When You’re in a Crunch, Managing Cash Flow is a Make-or-Break Discipline

At a minimum, a successful cash-conservation program contains four key elements:

  1. Reliable cash flow forecasts based on accurate data from all relevant sources
  2. A clear understanding of the cadence of expenditures
  3. A well-stocked toolkit of available action steps addressing both spending control and revenue generation
  4. Companywide support based on transparency, full disclosure, and an explanation of the positive impact of optimizing cashflow

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