Start-up advice I never saw: You need a custom cash flow spreadsheet
The standard income statement, balance sheet, and statements of cash flows may not be good enough to make hard decisions.
By the time we started Opex Analytics in 2013, I was primed to worry about cash.
A passage from the book The Goal had always stuck with me: as long as you have enough cash, you don’t notice it. But, as soon as you don’t have enough cash, nothing else matters. Lack of cash can sink you.
I also knew that profit was not the same as good cash flow.
For example, let’s say we had 10 people on the payroll in March and expenses were $100K ($10K per person). Let’s say we we did good work and billed our clients $150K in March. The profit we showed in March was $50K.
$50K profit is great. However, we might not see the $150K until May or later1. We needed $100K in the bank for March payroll.
Since we were bootstrapped, I knew I was going to worry about cash. I didn’t know that I would become obsessed with cash.
I was obsessed with checking our bank account within 2 minutes of waking up everyday to see if client payments came in. As soon as the mail came, I searched it for checks. Even though I’m not very pushy, I was obsessed with making sure our invoices went out as soon as the month ended. The sooner the invoices went out, the sooner cash would hit our bank.
My obsession made me do weird things. I worried about losing money if our bank account was hacked. Because of this worry, I went against standard financial advice and paid our vendors quickly. If someone did hack us, I wanted them to have to less to steal. I know, not logical, but it did help me sleep.
Obsessing is one thing, but that only got me so far. I needed a tool to help me understand our current and projected cash position.
I was surprised to find the three standard financial statements lacking.
The income statement showed me how expenses were trending (which I used in my tool) and showed profitability. If we were profitable, it told me we were doing something right, but it didn’t help me think about cash. For our business, I never found the balance sheet or statement of cash flows helpful.
I needed a cash tool to help answer our biggest questions— were we in danger of growing too fast and running out of cash? and how many people could we hire?
To answer these questions, I created a strategic cash flow spreadsheet. This spreadsheet showed how much we had in the bank, our bi-weekly expenses,2 when our Accounts Receivables would convert to cash, and when additional revenue would come in for future months. The spreadsheet would allow me to change when we would get paid, put in extra expenses, change the number of people we hired, and add in new potential contracts.
This was a strategic, not an accounting spreadsheet. That is, I rounded the expenses up and made pessimistic assumptions about when cash would come in. I just needed directional information- if we had 1 month of cash to cover everything, that told me to panic. If we had six months, we were good. Maybe if we pushed hiring, we could get down to three months of cash. In our business, we had to assume that within the next two months, we would win more business and that would keep pushing out the six month window.
I never ran across advice for entrepreneurs that suggested I would need such a spreadsheet. In fact, most people around me thought it was weird that I had it.
Once I had it, I couldn’t image running the business without. Sure, I looked at all the other standard reports in QuickBooks and watched other financial KPI’s. But, this spreadsheet felt especially important. It gave me a more complete view of what the risks were and helped us grow within the limits of our cash.
Even though it sounds easy, it’s not. Expenses can change fast, like with a tax payment. Or, it may take longer for a client to pay. One year, I really messed up the calculations. These miscalculations play out in painful slow-motion.
This particular miscalculation was at the end of year. We had the normal year-end bonuses, taxes came in higher than expected, we had office construction, and some extra hiring.
On New Year’s Eve, I thought we were good. By early January, our bank account was quickly draining. I knew there was a problem. By mid-January, I had knots in my stomach because it looked like we would run out of cash in mid-February. We started calling customers to speed up some payments. By the end of January, I was losing sleep. I was thinking that by Valentines Day, I would have to max out our line of credit3 and take a second mortgage on our house.
And, all of this happened when the business was doing great. This miscalculation would have been more painful if the business was not doing well. We got lucky and received a few big payments for customers in early February. We were good, but it took us until May or June to build up our cash buffer again.
I’ve since learned that having this spreadsheet is not so strange and would be good for entrepreneurs.
On a How I Built This podcast, the founder of Goodreads mentioned how he ran the business with a spreadsheet that sounded like mine. At the beginning of a My First Million Podcast, the host and the guest (both entrepreneurs) talk about how they managed their growth and business by watching the cash similar to how I did it.
It was only in 2020, after Coupa acquired us, that I learned there is actually a corporate function that does this— Corporate Treasury. Coupa has a product that helps people in treasury. When, a Coupa executive was explaining to me what the product did (make sure large companies have enough cash and that cash is in the right place), a light bulb went off in my head— this is what I was doing at Opex Analytics! I guess I never heard of the Treasury before because if is doing a good job, there is no excitement at all.
Start-ups need to do what treasury would do. You shouldn’t hire for this, but you’ll need to build yourself a good cash spreadsheet to help you understand and analyze your business.
Since we worked with Fortune 500 clients, I wasn’t worried about getting paid. Instead, I had to worry about when we would get paid. One client paid within a month, but most others took about two to three months to pay. And, for new clients, we a few that took over six months to get the payments flowing.
Since payroll was our biggest expense, breaking down expenses into 2-week buckets made the most sense.
It is good advice to get as big of a line of credit as possible as soon you can. We could never get very much, and it was mostly backed up by my house and social security number anyway.