A Startup CFO Shares the Cash Flow Advice Founders Need to Hear Now
During an economic free fall, Georgia Athanasiou of Bay Area CFO Consultants is on speed-dial for founders who have lived to tell the tale.
Georgia’s main advice during these dark times? Hunker down, and get your hands on more cash.
“Have enough cash for 18 to 24 months. And I know that sounds like a really long time, but you you may not have the same options in six months that you have today.”
Most investors expect startups to extend their cash runways to survive. But how do you do that when your business is at a standstill? Georgia shares the moves she’s advising founders to make right now — and clears up how small business grants and loans may offer some relief.
Keep in mind that details of the relief programs are changing every day. For the most accurate information on COVID-19 business grants and loans, get in touch with a tax professional.
Step 1: Measure your current financial position
Before you can up your cash flow, you need to take a snapshot of your financials. Ask yourself the following questions, and then run the reports Georgia recommends in your accounting software.
What does your bank account look like today? What will it look like soon?
Gather the following numbers and reports:
- Cash balance: How much money do you have in the bank and how long will it last?
- P&L statement for last few months: What is your revenue minus expenses?
- Accounts Receivable: Who owes you money, how much do they owe, and when is it due?
- Accounts Payable: Who do you have to pay, how much do you have to pay, and when is it due?
What are some of your larger expenses and obligations?
Now, start thinking about your bigger line items. This might include legal expenses, marketing spend, and other products and services you buy to keep your business going.
- Payroll (for employees and contractors): Create a detailed list of names, positions, and wages.
- Inventory: What have you committed to purchasing? Are your suppliers impacted by the pandemic?
- Bank loan: What are your terms? When are payments due?
- Credit: If you have a line of credit, when is that due?
All of these inputs will lead you to the next step — extending your runway.
Step 2: Increase your runway
Once you know where you stand, it’s time to get more cash flowing into your business. According to Georgia, the best way to do this is by renegotiating all of your existing commitments.
“Renegotiate, renegotiate, renegotiate to get more cash flowing in and less cash going out. The goal is to just get it in the door as quickly as you can.”
Here’s how to do that:
To speed up payments coming in:
- Offer a discount to customers if they pay early or prepay.
- Factor or sell your accounts receivables to bring in immediate cash.
To slow down payments coming out:
- Vendors: Renegotiate payment terms with your vendors or set up payment plans since they’d probably prefer some cash than canceled orders. You could also request lower prices in exchange for a longer contract.
- Rent: Ask your landlord about deferring payments or lower rent in exchange for extending the lease.
- Suppliers: This is a good time to renegotiate better terms. If that fails, look at other suppliers.
- Non-headcount spend: While trimming down, focus on larger expenses so you can have the biggest impact on your bottom line, like marketing or travel.
- Bank loan: Renegotiate a lower interest rate and terms. Banks want to keep your business — and they want to keep you in business.
- Employees: You want to explore all avenues before reducing staff. But if you have to cut here, know your options and how that will impact your team. You can 1) freeze hiring, 2) rescind offer letters, 3) cut executive bonuses and salaries (and maybe offer more equity), 4) furlough employees (which is basically unpaid leave), 5) make across-the-board salary reductions, or 6) lay off employees as a last resort.
If you have to reduce staff, do it once, Georgia says. If you do it in waves, it kills morale for the employees that stay.
Step 3: Manage your cash position
Once you’ve cut expenses, it’s time to over-prepare. This means running financial scenarios that show what would happen if your revenue was reduced by different levels — or even completely.
Be sure to include potential sales slowness, supply chain disruptions, and any renegotiations into your models.
“You want to know what’s coming in, what’s going out, and what your cash balance is today. Don’t do it once and check off the box. You’re not done.”
Georgia recommends using these two templates, and updating them weekly.
Each week, update this template for actual cash flow activity, re-forecast if anything changes, and add a new week to keep it rolling.
Keep your models simple and high-level, and include a monthly cash flow forecast as part of this process.
Georgia also stresses the importance of planning for the worst through these two exercises:
- Breakeven scenario based on existing capital: Georgia thinks it will be easier to get bridge loans or some smaller amount of capital than doing full-on financing. This scenario will help you if that’s what you decide to pursue.
- Catastrophic scenario based on 100% revenue loss: Forecasting complete revenue loss will give you good visibility into where you are and what you can do to overcome the unthinkable.
Step 4: Get assistance
Your final step is to see if your startup qualifies for any small business grants and loans. The programs Georgia details below are live but still in flux as they’re being interpreted by the pros.
For more guidance specific to your business, talk to your CPA, tax expert, attorney, banker, and HR/payroll provider.
Wait, does my startup even qualify for government assistance?
You might, if the affiliation rules get resolved.
The affiliation wrinkle is what complicates SBA loan eligibility for venture-funded startups. SBA loans are designed for companies with fewer than 500 employees, and that includes affiliates — a barrier for most startups.
But there’s a lot of work being done to open the door for venture-funded startups to apply for some of these loans. Your CPA will know best, so ask them, since it could be worthwhile.
The relief programs startups should investigate
The Paycheck Protection Program (PPP)
Georgia’s pro tip: PPP funding ran out on April 17, but lawmakers are quickly working on replenishing the program. Work on your application and if possible, apply through your bank, since extra funding is expected to go through.
You can apply through your participating bank (some are accepting applications only from existing customers), or directly through the SBA once the program restarts.
- If you maintain payroll through June 30, 2020, you can request forgiveness on the loan principal if it’s used for payroll, group health insurance, mortgage interest, rent, or utilities.
- The loan amount is the lesser amount of $10 million or 2.5 times your average monthly payroll plus anything you’ve received under the EIDL (which we’ll explain below).
- Eligible salaries are capped at $100,000 per employee.
The Economic Injury Disaster Loan (EIDL) Program
Georgia’s pro tip: EIDL grants are also paused until Congress and the White House add more funding. Like the PPP loans, work on your application until the program opens up again.
- Emergency EIDL grants: These are one-time $10,000 emergency advances for small businesses that were operational as of Jan 31, 2020. It says it’s funded in three (although many business owners report that’s not the case), and you’re not required to pay back. The online application takes about 10 minutes to complete.
- Regular EIDL loans: You can borrow up to $2 million, and they require underwriting collateral and a personal guarantee. The interest rate is 2.75% for non-profits, and 3.75% for small businesses. These loans are not forgivable, like the PPP loans.
Payroll tax credits
Georgia’s pro tip: Talk to your CPA or payroll provider to see how these tax credits will work in parallel with other relief programs. PPP recipients aren’t eligible for claiming these tax credits, so make sure you know which program is best for your business before applying.
- Families First Coronavirus Response Act: This Act provides credits against the Social Security tax for eligible employees taking paid sick leave and paid family leave.
- CARES Act: There’s also a refundable tax credit for companies impacted by COVID-19. The credit equals 50% of up to $10,000 in wages per employee, for a maximum credit of $5,000 per employee. (PPP recipients aren’t eligible.)
- Social Security tax deferral: You can defer your deposit and payments for employer-paid Social Security taxes for the rest of 2020. That means 50% is deferred until the end of 2021 and 50% is deferred until the end of 2022.
Georgia has used this NSF grant program with other startup clients who are looking for alternative types of financing. To be eligible, recipients must meet federal research goals and have high chances of commercialization. The initial grant is $225,000, and the second phase is $750,000, which is harder to get.
Learn more about the grant program and how to apply on the program’s website.
Times are tough, but if founders focus on strategies that will extend their cash reserves, they’ll have a better chance of making it once we’ve crushed the curve.
“To get through the crisis, many businesses will need to go into survival mode. And in survival mode, cash is queen.”
Georgia admits that none of the work she outlines above is fun. But by planning for the worst-case scenario — and using the tools and best practices that CFOs swear by — you’ll give your startup a fighting chance.