# Cash Management Reference Cash is the oxygen of a startup. You can be unprofitable for years. You cannot be out of cash for a day. --- ## 1. Cash Flow Management ### The Cash Equation ``` Ending Cash = Beginning Cash + Cash collected from customers - Cash paid to employees - Cash paid to vendors - Cash paid for infrastructure - Debt service +/- Financing activities Note: This is NOT the P&L. Revenue recognition ≠ cash collected. ``` ### Where Cash Hides (and Leaks) **Cash sources you might be under-using:** - Deferred revenue (annual billing locks in cash 12 months early) - Customer deposits on enterprise contracts - Vendor payment terms (Net 60 instead of Net 30 = free float) - AWS/GCP startup credits (often $25K–$100K available, widely unused) - Revenue-based financing on predictable MRR - Venture debt (non-dilutive, available post-Series A) **Cash drains that sneak up on you:** - Annual software licenses paid in Q1 (budget for the lump sum) - Event sponsorships (often 6-12 months in advance) - Recruiting fees (15-25% of first-year salary, due on hire) - Legal fees (data room prep, fundraise close = $50K–$200K surprise) - Late-paying enterprise customers (Net 60 in contract, pays Net 90 in practice) ### Cash Flow vs P&L: The Gap **Scenario: $1M enterprise deal signed December 31** ``` P&L impact (accrual): December revenue: $83K (1/12 of annual) Cash impact: If billed annually upfront: +$1,000K in December (GREAT) If billed quarterly: +$250K in December (good) If billed monthly: +$83K in December (fine) If Net 60 terms: +$0 in December, +$83K in February (cash drag) ``` **The CFO's job:** Maximize the timing difference between cash in and cash out. - Collect from customers as early as possible (annual upfront, early payment discounts) - Pay vendors as late as possible (maximize payment terms) - Never confuse deferred revenue (a liability) with actual cash (it is cash — just count it right) --- ## 2. Treasury and Banking Strategy ### Account Structure ``` Operating Account (primary bank): Balance: 3-6 months of operating expenses Purpose: Payroll, vendor payments, day-to-day ops Product: Business checking or high-yield business savings Bank: Chase, SVB successor (First Citizens), Mercury, Brex Reserve Account (secondary or same bank): Balance: Everything above operating float Purpose: Reserve; move to operating as needed Product: Money market fund or T-Bill ladder Target yield (2024-2025): 4.5%–5.2% Products: Vanguard VMFXX, Fidelity SPAXX, or direct T-Bills via TreasuryDirect Emergency Account (separate bank): Balance: 1-2 months expenses Purpose: If primary bank has issues (SVB taught this lesson) Product: Business savings ``` **FDIC coverage:** $250K per depositor per institution. For balances above $250K at a single bank, either: - Use CDARS/ICS (bank sweeps into multiple FDIC-insured accounts automatically) - Spread across multiple banks - Move excess to T-Bills (backed by US government, not FDIC, but safer) **After SVB (March 2023):** Every CFO should have at least 2 banking relationships. If one bank fails or freezes, you can make payroll. ### Yield on Cash At $3M cash, the difference between 0% (checking) and 5% (T-Bills) is $150K/year. That's a month of runway for a $150K/month burn company. **Get yield on reserves.** ``` Monthly yield on $3M at 5%: ~$12,500 Annual: ~$150,000 This is not optional. Set it up once and automate. ``` --- ## 3. AR/AP Optimization ### Accounts Receivable: Get Paid Faster **Billing model impact on cash:** ``` Annual Upfront Quarterly Monthly Net 30 Monthly Cash Day 1: 100% of ACV 25% of ACV 8.3% 0% Cash Month 2: 0% (done) 0% 8.3% 8.3% 12-month total: 100% 100% 100% 100% For $100K ACV customer, Year 1 cash: Annual upfront: $100K immediately Monthly Net 30: $8.3K × 11 months = $91.7K (1 month lag) Cash benefit: $100K vs $91.7K = $8.3K benefit + no collection risk ``` **Push for annual billing. Make it easy with a discount:** ``` "Pay annually and get 2 months free (16% discount)" Most SMB customers will take this. Enterprise: use MSA structure with annual invoicing, not month-to-month. ``` **AR Aging Policy:** ``` > 0-30 days: Current. No action. > 30-60 days: Friendly reminder from AR team. > 60-90 days: Escalate to Customer Success. > 90 days: CFO or CEO-level outreach. Consider collections. > 120 days: Reserve for bad debt. Legal/collections. Reserve policy: 50% of 90-120 day AR, 100% of > 120 days ``` **What slows down collections:** - Wrong contact (billing contact vs. user) — get finance contact during onboarding - Enterprise PO required — know this upfront, not when invoice is due - Credit holds or budget freeze — your CSM should surface these early - Invoice errors — every wrong invoice extends payment by 30-60 days ### Accounts Payable: Pay Slower **Standard terms by vendor type:** ``` SaaS tools: Net 30 default. Push for Net 45 or Net 60 at scale. Cloud providers: Pay as you go. Apply for credits first. Professional services (agencies, lawyers): Net 30 minimum. Get Net 45 where possible. Rent/office: Whatever the lease says. Negotiate quarterly payments if you can. Payroll: Pay on time. Never delay payroll. Ever. ``` **Early payment discount trap:** ``` "2/10 Net 30" means: 2% discount if you pay in 10 days, else pay in 30. Annual cost of NOT taking this: 2% × (365/(30-10)) = ~36% APY ALWAYS take early payment discounts > 2%. Never take discounts < 1%. ``` **AP workflow:** 1. All invoices → finance inbox (not individual employees) 2. Approval required above threshold ($500 for startups) 3. Pay at end of terms, not when invoice arrives 4. Batch payments weekly (not daily) to reduce processing overhead --- ## 4. Runway Extension Tactics Use these when you need to extend runway without raising. Ranked by speed and impact. ### Tier 1: Fast Cash (Days) **Annual billing campaign:** ``` Target: Existing monthly customers Offer: 2 months free (16% discount) or 1 month free (8% discount) for annual upfront Process: CSM-led email campaign to all monthly customers Impact: $X MRR × 12 × conversion rate = immediate cash injection Timeline: 2-4 weeks No dilution. No debt. High impact. ``` **Prepayment incentive for pipeline:** ``` For deals in late stage, offer annual upfront pricing with 10-15% discount. Close rate may increase. Cash timing dramatically improves. ``` ### Tier 2: Cost Control (2-4 Weeks) **Hiring freeze:** ``` Every unfilled role = salary × 1.25 per month. For a 30-person company, 3 open roles at $150K average: Monthly savings: 3 × $150K × 1.25 / 12 = $47K/month Over 6 months: $280K Impact: Immediate. No blood. ``` **Software audit:** ``` Pull all credit card charges and ACH debits. Cancel any subscription not used in 30 days. Typical savings: $3K-$15K/month at Series A stage. Tools: Vendr, Spendesk, or just a spreadsheet of recurring charges. ``` **Cloud cost optimization:** ``` Right-size instances (dev/staging don't need prod-scale) Reserve instances (1-year reserved = 30-40% savings vs on-demand) Delete unused resources (load balancers, IPs, old snapshots) Typical savings: 20-35% of current cloud bill ``` ### Tier 3: Vendor Renegotiation (2-6 Weeks) **Payment term extension:** ``` Ask key vendors for Net 60 instead of Net 30. $500K in AP × 30 days = $500K × (30/365) = ~$41K cash float improvement Won't always work, but vendors often say yes to good customers. ``` **Renewal timing:** ``` Push annual renewals to later in the year. Preserve cash for Q1 (typically heaviest sales hiring quarter). ``` **Vendor credits:** ``` AWS: AWS Activate (up to $100K for qualified startups) GCP: Google for Startups (up to $200K) Azure: Microsoft for Startups (up to $150K) Stripe: Revenue share programs Hubspot: Startup pricing (90% off) ``` ### Tier 4: Financing (Weeks to Months) **Revenue-based financing:** ``` Providers: Clearco, Capchase, Pipe, Arc Structure: Advance 3-6 months of MRR. Repay with % of monthly revenue. Cost: Typically 6-12% annualized. Speed: 1-2 weeks to close. When to use: Bridge to next ARR milestone before raising equity. When NOT to use: When burn rate is structural (will consume the advance fast). ``` **Venture debt:** ``` Providers: SVB (now First Citizens), Western Technology Investment, Hercules, TriplePoint Structure: Term loan, typically 3-6x monthly gross burn Interest: Prime + 2-4% + warrants When available: Post-Series A, when revenue is predictable Typical timing: Add alongside an equity round (don't raise debt when you need equity) Impact: Extends runway 3-6 months without dilution When NOT to use: If you might trip financial covenants (minimum cash, revenue) ``` **Convertible bridge:** ``` Existing investors write bridge note: $500K-$2M at favorable terms. Structure: Converts at discount (10-20%) or cap into next equity round. When to use: You're 60-90 days from closing an equity round and need cash to get there. When NOT to use: As a long-term strategy. Bridge-to-bridge is a death spiral. ``` ### Tier 5: Structural Cost Reduction (Weeks + Impact on Morale) **Salary deferrals (founders first):** ``` Founders take 20-30% salary reduction, accrued for future repayment. Signals commitment to team and investors. Only ask employees to follow if founders go first. Always pay market rate to key non-founder employees — you can't afford to lose them. ``` **Reduction in force (RIF):** ``` Threshold: If burn multiple > 3x and growth < 20% YoY, a RIF is likely necessary. Sizing: Model to achieve at least 12 months runway without fundraising. Rule: Don't do a RIF twice. Size it right the first time. Two small RIFs destroy morale worse than one decisive one. Process: Legal counsel required. WARN Act (60-day notice) if > 100 employees. Focus cuts: G&A and underperforming sales roles first. Protect engineering and key revenue. ``` --- ## 5. When to Cut vs When to Invest ### The Framework **Cut when:** - Burn multiple > 2x and growth is decelerating - Runway < 9 months with no fundraise imminent - LTV:CAC declining for 3+ consecutive months - Any spend category with no measurable return in 90 days - Headcount in functions not directly tied to near-term revenue or product-market fit **Invest when:** - Magic number > 1 (every dollar in S&M returns > $1 in gross profit) - LTV:CAC > 3x in a specific channel (pour money in) - Gross margin > 70% (unit economics are healthy; growth is the constraint) - Cohort data improving (retention getting better → LTV going up → invest in growth) - CAC payback < 12 months (you get your money back fast enough to keep reinvesting) ### The False Economy Trap **Don't cut:** - Top-of-funnel demand gen that generates qualified pipeline (if CAC payback is < 12 months, this is your best investment) - Engineering capacity on core product (technical debt compounds and slows you down permanently) - Key account managers on your largest customers (churn from top customers is catastrophic) **Cut these first:** - Conference sponsorships with no measurable pipeline - Tools and subscriptions with < 5 users or < 30% utilization - Agency spend that could be done in-house - Roadmap items that aren't tied to retention or expansion revenue - Any G&A spend that isn't legally required ### Decision Triggers (Pre-Define These) Don't make these decisions in a crisis. Define the triggers now: ``` At 12 months runway: Review all discretionary spend. Start fundraise process. At 9 months runway: Implement hiring freeze. Fundraise is mandatory. At 6 months runway: Cut non-essential spend 20%. If no fundraise term sheet, run RIF model. At 4 months runway: Execute RIF. Explore all financing options. Notify board. At 3 months runway: Emergency plan only. All options on table (bridge, strategic, wind down). ``` --- ## Key Formulas ```python # Net burn net_burn = gross_burn - revenue_collected # Runway (months) runway_months = cash_balance / net_burn # Cash conversion cycle ccc = days_sales_outstanding + days_inventory_held - days_payable_outstanding # Lower CCC = better cash efficiency # Days Sales Outstanding (DSO) dso = (accounts_receivable / revenue) * 30 # monthly revenue # Days Payable Outstanding (DPO) dpo = (accounts_payable / cogs) * 30 # target: maximize this # Working capital working_capital = current_assets - current_liabilities # Quick ratio (liquidity) quick_ratio_liquidity = (cash + ar) / current_liabilities # Target: > 1.5 (you can pay short-term obligations without selling assets) # Free cash flow fcf = operating_cash_flow - capex ```