Runway 101: Cash is King

Last week, we had very good discussion on Cash with SaaS entrepreneur.

Actually, the discussion started on his losses, which was not showing a turnaround for the next months to come and associated cash flow problem.

This is because they have to invest heavily upfront to acquire the customer, but revenue from that investment comes over a long period of time. The faster the business decides to grow, the worse the losses become.

In fast growing SaaS, the key function of Cash is time — time to market, time to the next funding round, time to product development and so on.

In established and listed companies, the key function of Cash is the profit distribution to owners or lenders.

Company never goes bankrupt only because of unprofitability. The key reason is always Cash.

Cash has time value. It gives decision points to the growth strategy, whether it’s bootstrapped or funded.

Cash should included as a regular item in board agenda.

I’ve been working with Cash startup’s to listed companies, from double-digit growth stage to global, established ones. Basic principles of cashflow optimization are universal, not dependent on business model.

Rule number one is to focus on invoicing. Organic cashflow is always the most important funding source.

Specially in SaaS, where business model often translates into a cash flow challenges, only propose advance payments and short payment terms with strict credit control.

On cost side, best performing companies don’t spend in front of revenue, they spend only behind revenue.

Accounts receivable is not balance sheet item, it’s our funding to customer.

External funding sources are the last on the list. Cash limit is an efficient buffer. The larger the company grow, the better are cash and working capital funding facilities: factoring, trade finance, supply chain finance and cash pool structures.

Don’t raise until the business works, with all expenses accounted for.

The author is the Founder of BackedByCFO, CFO As A Service from seed to IPO.