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How to Tune Up Your Emerging Growth Company’s Grasp of Cash Flow

Cash flow is the lifeblood of all businesses—and it’s especially crucial for small and medium size companies. Issues with cash tend to occur early on in a company’s journey, as the timing of securing sales, collecting payments, paying bills and meeting credit obligations rarely line up. By understanding how different aspects of the business can affect their solvency, and subsequently their relationships with customers, suppliers, and lenders, companies can minimize the risk of sustained cash flow issues taking the business down.

If your company is facing any of the following problems, which are pretty common for many emerging growth companies, it’s time to implement some changes.

You Don’t Have a Handle on Committed Business Expenses 

Cash commitments usually get tied up long before you can generate enough revenue to cover them. That’s why you need full visibility of your incurred expenses—such as payroll and inventory. An inability to correctly know and forecast expenses will affect your ability to pay for them eventually. 

Cash flow fix: A finance function that can produce reliable budgets, forecasts, and financial statements, including a cash flow statement, is in order. Then you can compare your budget to actual results on a timely basis and make adjustments. In addition, a rolling weekly cash flow forecast that covers at least 13 weeks will help you anticipate issues, minimize surprises and give you a way to track progress against actual results.

You’re Missing a Robust Collections Process 

Many fast-growing companies are focused on selling and securing deals—and haven’t yet put the resources toward making sure their customers will pay up. However, a loose customer receivables process will catch up to you. 

Consider that in Q2 of this year, 26 industries reported more than 10% of the dollars they were owed by customers were over 90 days past due, according to Dun & Bradstreet and the Credit Research Foundation’s quarterly report on accounts receivables. Rather than a disciplined process, many small and medium businesses undertake an ad hoc approach and only occasionally call up customers to ask for what they’re owed.

Cash flow fix: Get a collections process going ASAP, and always send invoices to customers on a timely basis. You would think this advice is obvious, but many companies fall behind on sending this paperwork even though most customers will not pay without an invoice.

After you’ve sent the initial invoice, follow these steps:

  1. Make contact before the due date: Confirm that the customer has received the invoice and ask if there are any potential problems.
  2. Check in at the due date if payment hasn’t arrived: Ask when you can expect to receive payment.
  3. Follow up after the due date: Don’t hesitate to have the uncomfortable call with the client and press about when the payment will be made. Left unaddressed, this issue will likely get worse. 

You Don’t Have Cash Reserves 

You can’t plan for the unexpected, but you can assume that something unexpected will occur. Overly optimistic revenue forecasts coupled with unexpected or under planned expenses is a recipe for cash flow problems.

Cash flow fix: Include “what if” scenarios in your financial forecasts, including: What if revenue targets are not met (i.e., revenues decline by 20%)? What if customers take 45 to 60 days to pay you rather than the standard 30 days? What if a significant unexpected expense pops up? This thought process will get you thinking not only about how these variables can impact your cash balance but what steps to take when something unexpected happens.

You’ll also want to set aside case reserves. This will buy your business more time if things go wrong. To be diligent about funding it, create a separate bank account and treat it like you would any other fixed payment. You could put a fixed amount toward it each month or follow another target, such as putting a percentage of your monthly revenue into the account.  

You Don’t Have the Right Accounting Team in Place 

Financial accounting is the language of the business, so your financial statements are your company’s story. If your company is unable to consistently pull together financial statements that can be relied upon, you can’t make inferences over how your business is doing and will fare in the near future (including cash flow).

Cash flow fix: When knowledge and skills gaps are preventing your company from producing comprehensive financial reporting and forecasting reports, you can turn to finance and accounting experts who will introduce workable processes that will connect you with the information you need to run your business.

A sound accounting and finance foundation is key to a successful business. It’s the way toward producing a steady flow of up-to-date information you can rely on to make the right decisions. Do you know your gross margins? Your operating income? How do those figures compare to historic figures, your budget, and your forecast? When you have access to financial experts who can explain all of this plainly, on an ongoing basis, you will understand how the company is performing and its ability to continue as a cash flow positive company—and a thriving one.

Isn’t it time to truly understand your business? Our Emerging Growth consulting solutions connect the dots for small and midsize companies, through financial expertise, CFO and controller guidance, streamlined accounting systems, and more. Reach out to RoseRyan today to find out how we can help your fast-moving company. 

As Chair of RoseRyan, which she founded in 1993, Kathy Ryan guides our finance and accounting consulting firm’s overall mission, strategy, direction and investment decisions. She guided the firm for 26 years under an innovative business model, with flexible work arrangements coupled with a highly supportive, values-based culture, before naming David Roberson as chief executive in 2020. Kathy has been recognized as a thought leader, innovator and strategist, building upon her extensive CEO and CFO experience working with more than 50 Silicon Valley startups. Before RoseRyan, Kathy was director of finance at Quantum and tax manager at Price Waterhouse.

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Scaling Your People While Scaling Your Business

Scaling the business is a top goal for many startups at a certain point. To get to the next level, it’s time to invest in the skills your company is missing, at a pace that isn’t too much, too soon. Since the people aspect of the business is both your most valuable and priciest resource, you’ll want to put attention on scaling your people as you scale your business.

What Do We Mean by Scaling?

Scaling puts the focus on growing the business with intention, in a cost-effective, efficient way. It requires laying down a foundation for supporting and enabling this growth, with streamlined, consistent processes; order in the financial operations; with the right people, systems, and partners in place. For emerging growth companies, shifting gears from survival mode to scaling requires big changes, including new faces—but that doesn’t mean you need to fully load up on payroll right away.

Scaling for Skills: What Do You Have, What Do You Need?

Take a look at your current employees and leadership team, and consider what skillsets you may need to bring in now and over time:

Evaluate everyone. Some of the people who were once a good fit for getting the company off the ground may not be right for the new version of the company. Look at the strengths and weaknesses within your staff. You may need to rethink some roles, add new ones, and consider how outsourcing can fill in some gaps, on a flexible basis. These evaluations may lead to tough calls if some employees are not able, or unwilling, to scale with the company.

Understand current and future gaps. What skills will make the company stronger starting today? What about the significant changes you’ll be pursuing? If an IPO is on the horizon, for example, does anyone on staff have experience working at a publicly traded company? The expectations and scrutiny are higher, and experience with all that entails will be needed.

Don’t underestimate the need for flexibility. For the immediate future, as the company adopts new processes and systems, you’ll want to know whether the people you have on board are adaptable and open to change. Changes are never easy, but some people are roadblocks. You want people who are excited to—or at least willing to—learn and adapt to new technologies and new ways of working (smarter, not harder).

Be forthcoming about the changes. Some employees will discover that the future version of the company is not for them. They simply may prefer working in a startup environment and are averse to adjusting to a more structured environment.

People Principles for Scaling

Follow these principles as you become aware of the people who want to grow with the company, and the fluctuating skills you will need to bring in:

Make a plan. How will you take the company from point A to point B? How will you fund any expansions without burning through too much cash? What skills are missing and need to be filled now, and what skills could be filled later? And which skills could be outsourced for a time before hiring someone full-time? 

Build a great team and help them shine. Put effort into bringing out the best of those who are staying on board. The culture will shift as the company evolves but you can shape it into the kind of environment where people feel welcome, where they want to be their best selves and do their best work. Think about how the company can nurture the talents you have and keep everyone engaged. Let your star performers do what they do, and move out of the way so that they can shine.

Be creative with the skills you need. Outsourcing skills that are not core to the business (i.e., finance and accounting, marketing, IT) can help you supplement any missing skillsets that will help the company advance, build in cost control to your growth plans, and free up those star performers and other employees to focus on core functions.

Outsourcing provides optimum flexibility by reducing the risk of taking on full-time staffers for what could end up being a temporary need. When you find an outsourcing partner that can provide you with a range of talents and knowledge, you can access the level of expertise you need, when you need it.

Gaining Expertise, at the Right Level

For nearly 30 years, RoseRyan has helped hundreds of fast-moving companies achieve their growth goals, by helping them build practical plans; develop solid financial foundations; and supplement their skillsets with flexible, cost-efficient solutions. Access to expertise, at a part-time level in the beginning of the scaling effort, can help the company control costs and move at a sustainable pace. Then, as the company successfully advances with its plan, RoseRyan will train and transition incoming full-timers at the appropriate time. It’s one of the many ways we guide companies to greatness.

Ready to make a strategic move with your emerging growth company? Contact RoseRyan today to find out how we can help.

As Chair of RoseRyan, which she founded in 1993, Kathy Ryan guides our finance and accounting consulting firm’s overall mission, strategy, direction and investment decisions. She guided the firm for 26 years under an innovative business model, with flexible work arrangements coupled with a highly supportive, values-based culture, before naming David Roberson as chief executive in 2020. Kathy has been recognized as a thought leader, innovator and strategist, building upon her extensive CEO and CFO experience working with more than 50 Silicon Valley startups. Before RoseRyan, Kathy was director of finance at Quantum and tax manager at Price Waterhouse.

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Why Your Emerging Growth Company Needs CFO Expertise

Does your fast-moving company have what’s needed to keep its current pace in a sustainable way? Or are you losing sleep at night worrying about all the aspects of the business you simply do not know enough about or have time to deal with? In between starting up and scaling up quickly (or flaming out), emerging growth companies realize they are missing a level of guidance and perspective that only an experienced CFO can provide. Here are some of the many reasons your company could benefit from CFO input, which could occur on a part-time, interim or occasional basis.

CFOs shift the focus of finance from looking at history to looking toward the future. The accounting record of how the company has performed so far may be in good shape, but what do the numbers tell you? As a member of the team, a seasoned CFO will ask the questions no one else is asking: What are the areas that can most impact our profitability—how can we optimize our profit and minimize our risk? What resources do we need to turn our plans into reality, and what is the best way to obtain those resources? How can we create more value without expenses getting out of control? Are we charging a fair and competitive value for our product or service or is Sales giving away the store (or asking for the moon)?

When the accounting/finance team is running a million miles a minute to keep the financial operations running smoothly, there is no time left to get at these important, big-picture questions that are critical for setting a successful path for the company. This is where CFO guidance can be invaluable: When they become a part of the team, CFOs introduce a future mindset. The CFO will bridge what the historical data tells us today with what is needed for the future through analysis and the buildout of likely scenarios to demonstrate their implications for strategic decisions that senior leadership is considering.

CFOs have a knack for uncovering cost efficiencies and missed opportunities. As an experienced CFO, I always review contracts when putting together a budget, and recently this habit led to the discovery of a significant underbilling situation. The client company was entitled to higher management fees. The fact is, it’s in a CFO’s nature to pay attention to the details that others have forgotten or lack the time or skills to properly review.

CFOs will help you realize the true value of your product, company or idea. When companies are starting out, there’s a tendency to do whatever’s necessary to secure those initial sales and allay that fear of not being able to get enough business to survive, let alone thrive. However, a company may fall into the trap of undervaluing what it’s selling—in order to score those initial sales wins or reach a top line goal.

But what’s the result of those actions? Not charging what your product or service is worth not only devalues your company but leads your team to think that cost is the way to compete instead of creating value. CFOs can help your team to stay on the right track by focusing on the value you bring to the market and helping you set the pricing and terms for your services appropriately. It may not help the company to make a sale if you have to tie up your working capital for six months before you get paid or engage with a client that will not pay you. A good CFO will help you gauge those additional factors before the contract is signed.

You may occasionally have strategic reasons for wanting to do business with a customer for less than your normal pricing. Your CFO should ensure that you articulate those reasons so that the company discounts appropriately and not excessively. A good CFO should also help the executive team recognize when it is time to walk away from an unprofitable business or an unprofitable product line, or define the criteria necessary to make that business worthwhile. Understanding the value of your product or service and charging for it properly will ensure your survival.

When It’s Time to Seek a Senior Level CFO

We work with a lot of entrepreneurs who have amazing ideas and promising businesses. A common issue as they make progress on scaling their companies is knowing when or how to offload some of their oversight responsibilities and worries. For example, a technologist-turned-CEO who has a brilliant product that could be life-saving needs to keep most of his focus on getting out in the field to sell his product and drum up interest with investors. But there are so many other responsibilities that need attention, including HR, legal, compliance and risk management. With wide-ranging skill sets and experience, an interim or fractional CFO can take on oversight of these areas and help the company run more smoothly.

What’s one of the biggest benefits of having access to a CFO, whether it’s for a certain number of hours a week or on an as-needed basis? It’s their ability to help you sleep at night. They can let you know, “these are the things we need to worry about and these are things we do not need to worry about.” They can narrow down the key risks facing the company while also helping you manage them.

Learn all about our tailored finance and accounting solutions for emerging growth companies, and reach out to RoseRyan to inquire how interim CFO expertise can help your company’s quest toward greatness.

Andrew Katcher, a consulting CFO for RoseRyan, blends financial, supply chain and systems skills with vast international experience, having held Fortune 500 division-level controller positions in Japan, Korea, Australia, Europe, Israel and Singapore, in addition to serving as an interim CFO for U.S.-based companies. Past consulting clients include Facebook (Oculus division), SanDisk, Logitech, Amazon/Lab126, SunPower, NYK Logistics and Core-Mark. He recently led a company through an acquisition while guiding two other companies through successful Series A financing rounds.

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How To Build A Successful Emerging Growth Company

Getting a small business or startup past the two-year mark is just one of many promising milestones. So many young companies fail early, so passing certain goalposts can be gratifying to the owners and entrepreneurs of an “emerging growth company,” a fast-moving business that may be venture backed or will soon seek significant funding. How can you ensure a bright future as you build your business? Here are a few strategies that have worked for others who have successfully built a business.

The Basics of an Emerging Growth Company

There are various definitions of an emerging growth company. The most prominent comes from the U.S. Securities and Exchange Commission, which considers an emerging growth company to have less than $1 billion in total annual gross revenue in its most recent fiscal year. This qualification allows a pre-IPO company to follow reduced disclosure and reporting requirements for its registration statement with the SEC.

Another way to characterize an emerging growth company is by its stage in the business lifecycle. An emerging growth company not only shows promise, it is in the process of developing or solidifying a strong foundation on which to further build the business.

Still running on minimal resources, it’s received some validation from investors and customers, and it may or may not go public one day. The business is moving at a fast clip and probably wants to get on more solid footing. It’s around this time that leaders of the company realize they could use some help with understanding their business and how it’s performing. There are strategic decisions to be made, to take the company in the right direction, but any moves need to be based on timely, reliable financial data and what that data means.

The company may not yet be ready for a full-time CFO at this point, however. An outsourced accounting team with a part-time controller could be the right fit for getting the finances in order and gaining a better understanding of the business. Are the current plans realistic? What do we need to adjust in order to reach our main goals?

When companies are first starting out, really early on, there may not be much of a plan—more of a hope to explore if a tech innovation can turn into a marketable product. Or the start of a potentially life-saving drug that will need full funding and interest to get it through the development phases. Such companies start out by just getting by with minimal resources for completing payroll, recording transactions, and paying the bills. As the company builds up, however, the need for a different level of financial expertise quickly becomes clear. Establishing finance and accounting processes, getting on the right systems for the company’s size and complexity, and having CFO-level expertise when needed as the company prepares to seek funding are all steps toward  building a successful emerging growth business. These are steps for moving beyond the “building a startup” phase toward a brighter future.

The Essentials of Building a Successful an Emerging Growth Company

Is your emerging growth company prepared for the changes ahead? Do you wonder “How do I properly build my company?” or “What are the best ways to grow my business?” Start off by considering if you have some of the essentials:

  • A tailored plan for growth—that takes into account your talent, your goals, and where the company is at this moment
  • A tech stack of integrated applications (including software for accounting, payroll, expense management) to keep your financial operations running smoothly
  • Senior level financial expertise that can offer timely guidance as the company pursues growth plans or goes after funding
  • An honest, practical understanding of the business performance and forecasted future

Financial Reporting Requirements for Emerging Growth Companies

The expectations of an emerging growth company expands quickly once it pursues either debt or equity funding. It may need a higher level of financial help as it brings in more people and more talent to meet rising customer demand, ramp up sales and marketing efforts, or pursue an acquisition. While the company scales up, it also requires more structure and an understanding of whether and how it can keep up the pace with the resources it has and is planning to take soon. The company’s growth depends on making the right decisions.

Its financial reporting efforts need to be robust for the sake of decision-makers but also for its growing circle of stakeholders. Lenders will likely want to see audited financial statements, for instance, and the company would have to embark on a long and potentially complicated process to get that first audit complete. Many inquiries are likely to follow, so you’ll want a dedicated expert around who can support the company during the audit process, so everyone else can focus on their day jobs.

How Do You Build a Successful Business?

The million-dollar question any new entrepreneur wants to know: How do you build a successful business? Those who have done it know that it’s more than the product you sell or the idea you come up with. Your company could have the greatest, most unique idea for an app that every American will want to subscribe to over the next year. But, as your company considers adding this on to its portfolio, will it be able to keep up with demand? Does it have the capability of forecasting how long that demand will last? If your outlook is unrealistic, you could be setting up the company for a lot of disappointment—and disappointed users.

Make sure you have the information you need, exactly when you need it. When it’s time for your emerging growth company to further develop the finance function, bring in more finance and accounting expertise, and lean on growth consulting pros, you know where to reach us.

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