We recently held our annual gathering of the CEOs of the Osage Venture Partners enterprise technology portfolio companies. These sessions always prove valuable for us as investors and seem to be enjoyed and appreciated by the CEOs in attendance. While there is value in the structured agenda and the content that we prepare, many of the best out-takes come from CEO to CEO interaction. This is partially by design, given that we structure the agenda to spark conversation and keep the group intimate with few outsiders. Mostly though, the interactions are spontaneous and are sparked by common experience. There is a lot of camaraderie in trench warfare.
One conversation that stayed with me was some advice that a seasoned CEO and operator gave to one of our newer CEOs who had recently graduated from bootstrapper to venture-backed entrepreneur. The advice was to “look at your cash balance every day,” and continued: “Don’t get a report from someone else but go online, sign in, and look at the balance. Knowing what’s going on with your cash is knowing what’s going on with your business.”
This is great advice. Every entrepreneur should follow it.
Itzhak Sharav, a highly regarded Columbia Business School accounting professor and an epic figure in the Chemical Bank Credit Training curriculum, used to begin his course on financial accounting by writing three words on the chalkboard: “Cash is King.” Financial accounting is all about translating financial statements governed by GAAP to financial analysis that tells you what is really going on. And what is going on is cash. A good CEO does not leave an understanding of cash flow to someone else. Excellent CEOs know cash flow.
Jim Collins, before he was one of the most broadly read business authors ever, was a highly acclaimed lecturer at Stanford Graduate School of Business. He taught a course called Small Business Management which was really his test-bed for many of his perspectives that came to life in his later publications. One exercise, called Wild Neckties, required teams to build cash flows for a necktie business with a decently long supply chain, slow paying retailers, and aggressive suppliers. The take-away from the exercise was that in such a scenario high growth can exhaust your supply of cash, as the income statement might tell you good news while the cash flow statement told you the truth.
In addition to the advice above, some of my favorite cash management recommendations include:
Require two signatures on every check over $500 and make one of them be yours. This includes expense reimbursement checks. Make sure you are not just signing the check but that the check is attached to the approved invoice or statement. As any entrepreneur knows, signing checks is painful and a necessary evil. Looking at the details of the invoice and who signed off on it gives you a strong sense of how money is being spent and by whom.
Review the payroll every pay cycle and approve the disbursement. Understand how much is going out in every two week or monthly payroll cycle. If it seems to be going up versus previous periods, make sure you understand why.
Be put on the bank’s list of wire notifications and if possible, approve all wires yourself. Cash never leaves a company faster than through a wire.
Have a payables aging and accounts receivable aging run for you at least once a month if not weekly with a comparison to the previous periods. If you are visibly worried about cash, your people who manage payables may try to stretch them. If they do, you want to know about it because ultimately, these bills need to be paid. With A/R, slow collections can suck the life out of your business.
Maybe most importantly, know how many months of cash you have left. This means knowing your gross burn per month and your contractual receipts. You should always be able to answer two critical questions: 1) If you sold nothing else, how many months could you go?, and 2) What is your gross monthly burn? You should set a level ahead of time – maybe six months – and establish a rule that if, based on your monthly burn, you have less than six months of operating runway, you formalize your fund-raising strategy, or, if few alternatives are available, you take the actions necessary to reduce your burn and extend your runway.
When I became CEO of Verticalnet in November 2002, the previous CEO had resigned and had filed a 10-Q stating the company would be bankrupt in a few months. In my first meeting with employees after becoming CEO, I was asked publicly if we had enough cash to get through the end of the year because people needed to know if they could spend money on gifts for Christmas. I told them honestly that by my calculation we had at least four months of cash. In January, two months later, I was able to communicate that the timeline had been pushed to June and by March our visibility had extended until November. Mid-summer, we raised capital and extended the timeline much further, but for the five years I was CEO, I always knew “the number.” By keeping a close eye on cash, I followed the sage advice of our portfolio CEO, and remained intimately aware of our liquidity metrics.
As CEO, you may think you are in charge, but always remember – Cash Is King!