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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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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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Top 5 financial mistakes that startups make—and how to avoid them

The odds are tough for any startup. The business model is unproven, and the shift from prototype to product can take awhile. It’s all-hands-on-deck, which can be rough going when the team is so small. On top of that, everyone’s getting used to working together, and no one person is an expert in every aspect of running a business.

The good news: Even the smallest, youngest companies can better their odds when they recognize their skills gaps and seek out ways they can build a strong foundation for the future—yes, even as they struggle with the here and now.

We’ve worked with hundreds of tech and life sciences startups in the San Francisco Bay Area since 1993, and they usually have this burning question: How can we avoid the typical mistakes that startups make in finance?

This is where experience comes in handy. Learning from past mistakes and those of others is a huge advantage. We’re going to let you in on the common financial mistakes we see companies about to make when they’re starting out.

1. Forgetting about finance

Understandably in any startup, getting the finances is in order is not the number-one priority—it’s usually about getting a great product out the door. The finance function often doesn’t get as much love as it deserves in any startup, as the company tries to stay afloat while attracting new customers and investors. This can be a major mistake.

Paying the bills on time and employing one office manager who handles basic bookkeeping is necessary—but not enough. Startups still need savvy CFO skills, even if that’s on a very part-time basis at first, to think through a smart strategic plan, go after sound funding and plot milestones to get to the desired exit. These are strategic decisions, not bookkeeping basics. A company with just a bookkeeper is way behind and moving down a slippery slope.

CFOs and finance leaders model the burn rate and breakeven point, and they bless the sales forecast. Startups need someone who can go beyond the basic transactions and recordkeeping to actually design the financial strategy. Is it time to pivot? It’s better to have a well-formed plan than some reactive disappointments.

2. Overlooking the mantra that “cash is king”

Great cash management is critical in any startup. Everyone has heard this but not everyone quite believes it until they see firsthand what happens when more money is going out than coming in. Startups need to forecast all cash in and out, and manage spikes and dips. That information can change how your company manages business activity. And it means working with the person handling receivables so that collections don’t get out of control. Also make account reconciliations a regular part of doing business—especially bank recons—so you know how much cash you really have.

So we have another mantra worth memorizing: don’t think that P&L equals cash flow. No, no, no. Yes, you need to know your earnings and you need to know what you’re spending, but that’s only part of the story of how your business is doing. You need to track closely what’s going on with your cash balance and what’s moving it up or down.

3. Ignoring compliance

Ignorance is not an excuse that regulators will swallow. The risks are too high to be in denial. You need to get it done. Government intervention and auditor interference can make life downright unbearable if you don’t. And growth could stall as senior leaders get pulled off their day-to-day work to deal with pressing inquiries. In addition to the high stress involved, audits are disruptive to the business, and troublesome findings can result in penalties and interest charges. And there’s also the possibility of losing the ability to conduct business.

Private companies have a less weighty compliance load than public companies, but the list is still mighty long, between tax returns, labor laws, federal and state regulations, secretary of state filings, and so on. Lean on compliance experts who can help the company stay up-to-date so you can focus on your core job—growing the business.

4. Not planning for the future

It’s important to have a solid business plan. Projections are based on real, solid assumptions, not a finger in the wind. They will guide the company going forward while also ensuring that smart practices become a part of doing business. Smart moves include forming some good habits from day one. After all, make a mess in the early days and you’ll be mopping it up for years to come.

Do it right while you can—keep the books clean from the start, and you’ll see the benefits over time (lenders, for one, need to make sense of your finances or they’ll move on to the next business). Being GAAP compliant as much as possible will similarly help you in the long run. The same goes for compensation decisions you make today—If you’re doling out stock or options, invest in a 409A valuation once a year and anytime a major event occurs (such as a significant financing deal). This will help you stay out of trouble with the IRS and ensure that you properly account for stock comp.

The point here is to think about long-term efficiencies rather than just focusing on the short term. An exit strategy might sound like some far-off dream, but it should always be present when decisions get made. When the time comes to go IPO or to make the company look attractive for an acquirer, the work involved is huge—it can be even more enormous and make any deal shaky if lots of mistakes were made along the way. Set your financial processes in place to scale. Think of the long term.

5. Pretending but not really carrying out policies and procedures

Sometimes startups get sloppy about this. Accountants by nature, we’re sticklers for processes and procedures, but we also know these don’t come naturally to everyone. When your business is streamlined and humming along, extra work can be avoided and expenses kept in check. This happens when people know what is expected of them (policies, please!), the company keeps good records as a matter of course, and everyone knows that certain behaviors will not be tolerated.

Policies and procedures do not slow a business down—they actually keep it moving. Keep strong records now—make it a habit—and you’re setting up the company for efficiency.

Companies tend to be fairly simple at the start stage. As the complexities grow, the mistakes that are made in the early days will start to appear. The cracks can soon be crevasses. Trusted advisors who have the financial wisdom and high-level perspective can steer the ship well and head off mistakes before they happen.

RoseRyan guru Michelle Hall loves to help startups with getting their finances in order, meeting their compliance requirements, budgeting and forecasting, and more. Earlier in her career, she held roles at Netflix, Mercury Interactive, American Express and other firms.

Tracey Hashiguchi heads up RoseRyan’s small business team, a dedicated group of consultants helping companies launch and grow. She develops RoseRyan’s strategy, programs and consulting team for helping startups get to the next level. Before joining RoseRyan, Tracey worked at Deloitte.

Chris Kondo is a small business consultant helping companies make strategic decisions to manage their growth and run their accounting and finance functions. His consulting work at RoseRyan has put him in the finance teams at Roku, GenturaDx, Versatis and Lytro. He previously was vice president of finance at Azanda Networks, corporate controller at Chips & Technologies and director of business development at Intel.

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Is finance an afterthought? The rookie mistake that can doom a startup

During the initial months and years of a startup, CEOs are faced with the daunting task of building a company from the ground up. There are many issues to address, including product development, sales and go-to-market strategy, staffing, legal and finance. All of these are important areas to launch in order to get the company off to a great start.

But how much attention should each one get? All too often, in the push and pull when time is tight and so are funds, CEOs make the mistake of giving the finance side of the business short shrift compared to everything else. Understandably this happens when the biggest motivation at the moment is to get the business up and running. Survival is job one. Getting the finances in order rates as a low priority while other areas of the company receive the bulk of funding and care. “I’ll deal with that later,” the thinking goes, “and build it up in a few years when we’re really up and running.”

In the meantime, the company hires an office manager who takes on purely administrative duties, like handling payroll, processing stock administration, meeting the minimum compliance requirements, signing up for insurance, securing facilities, and creating and handling the initial accounting books of the company. While these are all necessary tasks and someone needs to do them, unfortunately, this person usually does not have the required skills and experience to handle them at a high level.

Is the cash burn rate being managed properly? Are the financials accurate? Is the company making the decisions about equity comp with the future in mind? Are inefficiencies building up and slowing down decisions that need to get made? Can one person pay attention to the changing tides of rules and regs?

Inevitably, problems will pop up if there is not someone or more than one person paying careful attention to the big-picture questions. Some of the potential problems are incorrect financial statements, serious delays in financial reporting, lack of expense control, payroll errors, inability to pass compliance audits, issues with stock administration, and numerous other tasks not being completed on time and up to par. The company could run into problems with lenders, banks, investors and see its growth potential falter—if inaccurate financial information is preventing smart decision-making.

Sounds messy and time consuming, and it is. It can also get expensive. Work will have to get re-done numerous times and the company could see increased expenses. And the CEO may have to run around fixing problems rather than building the business.

It’s completely understandable why finance does not get the full attention of the CEO in the “start” stage of the business lifecycle. It could be much too early to add a full-time CFO to the payroll. What is usually needed at this point is a part-time controller who can bring order to the mayhem and ensure all the yearly, monthly and daily requirements are done correctly. The role will help the company fend off potential issues and mishaps and keep the back-office running smoothly (and relieve some of the stress that is surely weighing down the office manager). So many startups get themselves in trouble when there’s a lack of order and discipline.

Another smart move around this time is bringing on an outsourced accounting team that can help the overloaded office manager by introducing efficiencies and new processes that will lead to reliable financials and a smooth operation. Over time, the company can work its way up to adding on a part-time CFO, who can provide critical strategic perspective for moving the business forward.

Put another way, the list of risky, rookie mistakes that are distracting to the CEO can shrink dramatically and the leadership can focus more on growth. The goal becomes how to get to the next level rather than “how are we going to get ourselves out of this mess?”

Need more input on the start stage and all the stages that follow? Download our intelligence report, Navigating the business lifecycle, which explores the four stages that companies typically experience, the finance challenges of each, plus real-life examples of organizations that have overcome typical obstacles.

Ron Siporen, a consultant on the RoseRyan dream team, has over 30 years of experience working with startup businesses, and he has been a successful business owner himself. He loves to help companies clean up problems and scale up for growth.

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The 4 stages of the business lifecycle and how to recognize what you need next

Many companies tend to follow similar patterns as they adapt and change over time. The trajectory is known as the business lifecycle, and we’ve identified four particular stages that companies typically move through from beginning to maturity. Knowing where a company lies along the lifecycle is critical for truly understanding its current and future finance needs.

Like humans, businesses have a growth track they follow as well as a constant pull to reevaluate who they are and where they’re going. As companies grow from the small-business stage and expand and evolve into fully fledged ongoing enterprises, they have to adjust to increasing demands and the rapid pace of change around them. And they need to constantly reinvent themselves to stay competitive.

With all these points in mind, we constructed our view of the stages of the typical business lifecycle and the different finance challenges that occur at each stage. Is there a pressing need for a huge ramp-up? Could an IPO give the company the boost it needs, or will it remain private indefinitely? Companies go through existential crises all the time, from startups cobbling together basic funds and a tight team, to large public companies facing pressures at a global level. The lifecycle is a useful map for the potential future journey of a company, and can help evaluate whether the finance team’s resources can keep up with all the changes and demands.

Here is our take on the four stages of the business lifecycle:

Start: The first stage of growth involves balancing the fight for survival with getting the small business up and running. It’s just a few employees forming a solid team, gathering funds together and developing a sellable product at warp speed. Many startup companies haven’t gotten around to setting up their financial infrastructure yet. They may need to lean on outside sources before they bring on full-timers.

Grow: This is the time of building the business rapidly to scale. It’s all about managing high growth on this rollercoaster, and potentially chaotic financial messes. Many companies need to rapidly set into place new organized processes and systems to get their financial house in shape and ready for the prying eyes of investors, auditors and potential acquirers.

Expand: Here is when companies move on to a whole new strategy for growth and it usually involves a big transaction. They may buy another company, merge or go for an IPO. What’s missing at this stage at times is a plan for traveling through it and getting through the aftermath. Most companies underestimate the work and amount of change involved.

Evolve: At the fourth stage, the mark of maturity, ongoing businesses hit a barrage of change at every turn, from high pressure by competitors, investors and customers to unpredictable business crises. They frequently need to reinvent themselves to stay a winner.

What keeps companies in motion? It won’t surprise you to hear that I believe the success of any company rides a lot on the strength of its finance team. With a solid financial infrastructure in place and access to just the right talent at the right time, the company can keep humming and stay on top of all the requirements. By having a strong financial backbone, with efficient systems and processes, companies can focus on strategic changes that will push the business forward. Those are the ones best poised for success.

At RoseRyan, we reflect upon each client and where they are in the business lifecycle, to best anticipate what services they might need most. Companies appreciate our experience—having helped hundreds of companies through each stage—and trust us to get them through it quickly.

For more about how RoseRyan helps across the lifecycle, go here.

Kathy Ryan is the CEO and CFO of RoseRyan. Since co-founding the firm in 1993, she has served as interim CFO at more than 50 companies.

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The big impact of small business fraud, and some smart steps to prevent it

We often hear more about fraud at large companies because of the hefty price tags involved and the large number of investors who may be affected. But the sad fact is that when small businesses experience a fraudulent event, they may be hit much harder and have more difficulty absorbing the losses. Innocent employees may lose their jobs, personal investments may be lost, and creditors may be wary of helping out the victimized business in the future. And smaller companies are more likely to experience a fraud than large ones.

In the past two years, nearly 30 percent of reported organizational fraud cases occurred at companies with fewer than 100 employees, and 24 percent of cases occurred at companies with between 100 and 999 employees, according to the Association of Fraud Examiners (ACFE) 2014 Report to the Nations.

And from a loss-to-revenue standpoint, their impact hurt more. Organizations with fewer than 100 employees had a median loss of $154,000, while those with 100-999 employees had a median loss of $130,000. The victim organizations with over 10,000 employees made up just 20 percent of the reported cases, experiencing a median loss of $160,000. (Keep in mind while all those median losses are at the six-figure level, one-fifth of all reported cases involved losses of over $1 million.)

The problem for many of these companies is they didn’t realize that fraud could be instigated by their most trusted employees.

A common thread
Smaller companies may underestimate their risk, thinking “it can’t happen to me.” And yet small organizations are disproportionately harmed by fraud losses, often due to employee misconduct, a lack of internal controls and segregation of duties.

And what kind of fraud is most prevalent? The fraud schemes most common in small businesses include corruption (33%), billing fraud (29%) and check tampering (22%). Embezzlement happens, particularly in organizations with inadequate controls or segregation of duties.

Awareness can reduce the risk
There are inexpensive and tangible actions that even the smallest of companies can take to reduce the risk of fraud:

  • Implement a code of conduct, and have employees acknowledge their compliance annually.
  • Perform supervisory or management reviews, particularly of complex, unusual or non-standard transactions.
  • Segregate duties that involve payments (e.g., adding vendors and employees to systems vs. paying them).
  • Separate cash handling, including bank deposits from bank reconciliation activities.
  • Hold employees accountable for the completeness and accuracy of financial statements (e.g., certification).
  • Provide a whistleblower hotline, keeping these points in mind:
    • While 68% of companies with over 100 employees have fraud hotlines, they are found only in 18% of companies with fewer than 100 employees, yet these simple tools reportedly reduced the median duration of fraud from 24 months to 12 months!
    • Posters improve hotline awareness within a company, and when the hotline can be accessed through the company extranet, customers and vendors have a vehicle to report potential fraud if necessary.
    • Educate employees on how best to raise flags and report suspicious activities.

The fact is that resource-strapped companies can prioritize activities that are proven to effectively reduce the risk and duration of frauds. For example, consider the feasibility of the following:

  • Fraud risk assessment: Identify your company’s fraud risks and brainstorm how a fraud might occur within company boundaries. If an insider wanted to do something inappropriate, would anyone take notice? Does the company have adequate controls to mitigate these potential risks? A formal fraud risk assessment tailored specifically to your company might be just what the doctor ordered and may help your organization avoid becoming the next victim.
  • Fraud training: Do employees know the warning signs of fraud? Teaching them the basics about fraud risks, red flags and the procedures for reporting suspicious activities may empower your team members to speak up or raise a concern.
  • Regular and surprise audits: Consider asking an internal auditor to conduct an occasional deeper dive audit in areas of potential risk. Should this include financial, cash handling processes, inventory or related party transactions?

It has been reported that companies lose 5% of their revenues to fraud. You don’t want your company to be the next one victimized or to be known for ineffective controls and management.

Alisanne Gilmore-Allen is a recent addition to the RoseRyan dream team. She is a Certified Fraud Examiner as well as a Certified Internal Auditor, Certified Information Systems Auditor, and she has a Certification in Risk Management Assurance. Alisanne spent over seven years helping Big 4 clients with enterprise risk management, and she has consulted for and headed the internal audit departments at Bay Area technology companies.

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