The path to profitability: extending cash runway in an unsteady climate

The survival of any business is contingent on cash in the bank. Without cash, even profitable businesses cannot survive. Better visibility of cash flows allows companies to proactively manage their cash positions and identify early warning signs. This enables businesses to make more informed decisions and demonstrate that they are financially responsible to their stakeholders.

What can you do?

• Develop a 13-week forecast updated on a rolling basis.
• Prepare this on a direct basis, which is based on receipts & payments and unwinding the ledger.
• Identify low points and proactively drive a mitigation plan. E.g., communicate difficulties in making supplier payments, accelerate collections such as early settlement discounts, explore HMRC support, leverage available credit facilities, et cetera.
• Link this to live systems to provide a low maintenance, accurate and up-to-date view.
• Drive cross-functional accountability through targets and performance-related incentives.
• Engage in active scenario planning with a constant review of assumptions.

A business plan alone is not sufficient to demonstrate financial credibility. Analysing a range of scenarios is vital in ensuring businesses identify potential risks and take proactive steps to mitigate them. This improves decision making and drives robust growth and financial performance.

What can you do?

• Identify potential risks, including those on underpinning assumptions.
• Develop a scenario model to assess the impact of different variations of these risks (e.g., increased funding costs, wage inflation, et cetera).
• Establish mitigating actions and test these.
• Review the results and refine your business plan and strategy accordingly.
• Understand what elements of your spend are to “maintain” versus “grow” your current business, so you can pivot quickly if the need arises.

As the current market proves to be challenging, achieving profitability remains out of reach for many companies. Many will face difficulties in growing income while managing both operational and interest cost. With tightening and expensive funding criteria, businesses should look to drive internal improvement before looking externally for additional cash.

What can you do?

• Establish full visibility of your cost base and benchmark against historical and peer performance.
• Identify root causes of poor EBITDA margins (e.g., lack of focus on profitable clients, large proportions of the staff base not focused on revenue generating activities, et cetera).
• Eliminate out of system, manual activities. Focus on automating and standardising key business to achieve cost scalability.
• Develop of a list of practical and quick win cost-out initiatives, including quantification of potential savings, cost to achieve, and implementation plan.
• Execute cost saving initiatives while tracking the ongoing realized benefits.
• Get visibility into your technology and development spend. Ensure there are clear roles and tracking.

Businesses should look to optimise their cash balances to fund operations and sustainable growth opportunities.

What can you do?

• Review compliance to internal processes, stock parameters, customer, and supplier terms.
• Tighten up overdue debt collection focusing on high revenue, notoriously poor paying customers.
• Negotiate extended payment terms with suppliers or request early settlement discounts.
• Ensure your invoicing and billing processes are streamlined and effective, particularly in professional services, to increase time to cash.

As a business grows rapidly, this can result in a lack of cost control and burning cash. Promoting a cash and cost-conscious culture is vital to ensuring the business grows sustainably. Internal and external transparency helps enable cultural change and drives trust and credibility amongst key stakeholders. A robust financial backbone also attracts investment and builds investor confidence.

What can you do?

• Distribute communications on the business, highlighting cost and cash and its targets.
• Drive visibility through regular updates on financial performance, customer growth and product development (e.g., monthly).
• Segment targets down to the lowest level with performance-related incentives.
• Define and share any goals, objectives and targets – as well as progress made against these.
• Be transparent on known risks and opportunities and mitigating action to be taken.