When we ran an entrepreneurs bootcamp called Fastrac® Tech Venture™, we had one module on finances. It was often one of the liveliest conversations and pragmatically useful sessions. We would share a cash-based method of managing the startup finances. This is not to be confused with accounting (also important but a different view of measuring the health of the business). Given the current economic downturn and uncertainty, a leader must have a dependable cash-based model before he/she makes any decisions.
In a cash-based model you start with what you have in the bank day 1 (beginning cash), what you can reasonably expect to collect (cash in) during the month, what you will actually spend in the month (cash out) and what you will end up with at the end of the month (ending cash). Which then becomes your beginning cash for the next month. You must build the cash model for at least 12 months out (ideally longer). Obviously the further out you go with projections the less sure you are of the cash in and the cash out. My recommendation is to err on the conservative side. Be realistic but very, very conservative.
Tools To Help
we are giving you a basic tool to help you get started. you will need to customize this for your business, the types of products/services you sell and the various cost buckets, but this should at least get you started. This cash-based model serves as the basis for as long as you can keep the doors open and when/if you will need to raise additional capital (future “new cash” in) to sustain the business moving forward. It’s also a good tool to help the leaders of the business understand what products/revenues bring in the money and where the business spends its money (people cost anyone?).
Once you build the first month’s version you can then insert actuals for the current month and see the ripple effect (good or bad) of this month’s performance downstream. Do this each month and you gain more and more knowledge and confidence in your future projections. We’ll get into scenarios planning in part II.
As a side note, I firmly believe that one of the advantages of bootstrapping your new company is that you are forced, by necessity, to operate the business on a cash-base model. Sometimes for a short time, and sometimes for the life of business. Every bootstrapped entrepreneur I know fully understands the cash flow of the business and the levers he/she can pull to change the future trajectory.
All founders/CEO must have this model now! In the midst the uncertain business climate. It’s mission critical that leaders take a hard look at the “survivability” of his/her business and a cash-based approach is the right tool to do that with.
In part II we’ll look at adding even more sophistication to the cash-based planning tool. We show you how to build scenarios and formulas to make “what/if” decisions.
For now, build your first iteration with this tool (sorry but excel just works better than google sheets) and start to understand how the cash comes in and where it goes and where you can save now. Remember, In uncertain times, Cash is King! Good luck