Avoiding a Cash Flow Crisis: How can CFO Partners Help?

It is difficult to overstate the importance of cash flow management for startups and small-mid-sized enterprises (SMEs) looking to remain competitive.

Unfortunately, businesses of all sizes experience a cash crunch at one point or another. It is a part of the business cycle, particularly in high-competition sectors like retail, hospitality, foods and beverages, and construction, where customer preferences and prices are bound to fluctuate.

However, a cash crunch crisis is amplified when your finance fundamentals are not in place. Without sound financial leadership, diagnosing and solving cash flow problems are virtually impossible.

While factors like operational costs, seasonality, and producer prices can impact cash flow, understanding how to position your business for better liquidity can help you turn around and become profitable. And that’s where a CFO partner comes in.

Can a CFO Partner Help You Avert a Cash Flow Crisis?

A business’ true strength lies in its ability to successfully navigate a liquidity crisis by proactively limiting the burn rate and boosting stakeholder confidence. Most founders and business owners struggle with deciding on the right course of action due to the lack of accurate financial data. In such situations, time is of the essence and delays can be detrimental to the health of the business.

Therefore, a CFO partner is crucial to implementing a successful turnaround and preserving business value. A CFO partner can not only help you understand your cash flow position more clearly but also deploy corrective measures during a crisis. At a time when business fundamentals are shifting across the board and massive consolidation is underway in key industries, cash flow management is more critical than ever before.

In addition to establishing financial discipline and regular reporting mechanisms, CFO partners help you address broader business issues affecting liquidity. Pricing, product strategy, fundraising, and revenue models, all play a vital role in liquidity management.

In our experience, to Crunchbase, the lack of liquidity is the second most common reason startups fail. 38% of all startups fail due to cash mismanagement. In order to steer clear from the dreaded death valley curve, you need to have experienced financial leadership to guide spending decisions and begin generating revenues.

The WeWork debacle of 2019 is a reminder of the impact that poor cash flow practices can have on businesses. The company “reinventing” office space leasing had to abruptly scrap its initial public offering (IPO) after potential investors rejected its inflated valuation. WeWork’s collapse was largely attributed to its massive cash burn rate aimed at undercutting its competitors in a race to the bottom.

Unfortunately, WeWork is not an outlier in the startup space. Major Indian startups and small businesses have been struggling with profitability and cash flow concerns over the past year as consumption declines.

The right financial leadership can be the difference between success and failure for businesses in 2020.

The Devil’s in the Data: Driving Profitability and Value Creation with CFO Services

Profitability is at the heart of every successful business, so, the ability to measure and predict future profitability is critical.

CFO partners can help you develop an understanding of your future cash positions by leveraging fiscal data and financial models. While historical revenue data can inform your cash flow management practices, it seldom includes macroeconomic trends that affect your business health.

CFO partners can dig deeper into the foundations of your business model and market realities to reveal broader macroeconomic factors such as customer confidence levels and competitor landscape to provide valuable insight into cash flow drivers and corrective actions if required.

Once you have the cash flow model in place, the next step is monitoring and optimizing the model to meet current operating realities. For instance, you must factor in customers who miss payments, sales strategies that do not materialize, or unexpected business expenses that come out of the blue.

CFO partners are instrumental in accurately monitoring results in real-time and helping you identify areas of process improvement to enhance your cash position.

As we explored above, most businesses do not have the financial strength to survive even a short-term cash crunch, so having financial expertise on hand is essential.

Working reports and accurate forecasts help you and your team make informed decisions that can help you ride out a cash crunch. Cashflow management is incredibly complex but is vital to running a successful business.

The good news is that you are not alone. Our CFO partners work with you to ensure that adebilitating cash crunch always remains at bay.