A few months ago, I implemented a wildly impressive Cash Management system for a client. It was cool.
This is an opportunity to revisit it to delve deeper into the topic, and to enable you to envision the journey to mastering your cash (it’s not that complicated).
1 - Context
A startup that has raised funds twice, with a few million in reserve.
Profitability has not yet been reached, but it's within sight. A good volume of transactions, a high but normal burn rate (hehe).
The CEO wants to:
- have better predictability regarding his cash,
- control cash flows,
- while optimizing the financial costs of his operations.
Luckily, that’s exactly what Cash Management is for. 🥹
2 - The Method
It involves four successive phases:
Understand - Forecast - Structure - Process
(not sure the last word actually exists)
Let's examine each of these points one by one!
a) Understand
We'll start by mapping:
- the main incoming and outgoing cash flows,
- the bank accounts and their uses,
- if applicable, the treasury agreements between the entities in the group.
The idea is to understand how cash is collected, how it goes out and circulates within the entity to identify potential gaps (and thus risks) in the process.
This is a super important phase for everything that follows.
b) Forecast and Anticipate
The Business Plan (BP) is the main element that will allow us to project our cash flows.
So, we'll start by revising this BP to ensure it provides sufficient data to project cash.
Then we set up a five-year cash flow forecast, which directly stems from the BP by adding a few assumptions about receipts and disbursements of BP revenues and expenses.
Thanks to this forecast, some really fun calculations to make:
- a nice calculation of burn rate (the rate at which we consume cash)
- and runway (how long until we run out of cash)
This quite macro forecast will be broken down into two more micro forecasts:
- a forecast for the current year (a bit more micro)
- a three-month forecast (even more micro)
We have all the reports we need.
It is now possible to integrate a routine of Forecasts VS Actuals, that is, comparing the actual movements from the past month VS the forecast
At the same time, we will insert into these reports an alert threshold mechanism adapted according to the real and anticipated evolution of cash.
We now have a solution for proactive liquidity management, which is great.
c) Put in structure
Now that we have the means to anticipate and forecast our cash flows, we have a great understanding of what's happening. We can now add some structure.
First, we'll rationalize the bank accounts, their use, and where we place them (traditional bank, neo-bank).
This rationalization will also make the cash in each bank account "make sense" (emergency funds, financing working capital needs, investments, or a future significant cash burn, etc.). Very useful for clarity and implementing controls.
All while optimizing banking fees, that is, avoiding unnecessary bank commissions. They add up fast for no added value.
We end up with a "target structure" of our bank accounts, adapted to the client’s challenges.
d) Put processes in place
The last step is setting up relevant processes to control how cash enters and exits the company.
For outgoing flows, reorganize:
- payment methods,
- signature authorizations,
- the procedure for committing expenditures.
For incoming flows:
- trace how cash enters,
- with the right tools (billing modality and payment due date, suitable payment method(s), payment facilities, etc...).
3 - The Result
Three main outputs:
- an effective and relevant cash forecast system, which we feed month by month and can compare/adjust according to actuals,
- controlled financial costs, but also overall controlled costs since we've addressed payment methods,
- and overall, we're making better decisions with the right resources.
4 - Bonus
A little touch to finish off beautifully:
- Documentation that explains the new system; it has great educational and legacy value,
- Regular monitoring that I can perform myself, or that someone internally can take over with good onboarding,
- The company is in a position to invest its "cash surplus" if it wishes (like in low-risk investments).
That's it, I hope you enjoyed this little client case.
Victor