No doubt about it, these are turbulent times. And it’s that turbulence –and how founders can chart a course through it– that formed the basis of our recent Survival Mode On sessions, a series of online talks and events held for our portfolio companies.

The latter part of the sessions was dedicated to ‘Securing your future’ and featured two talks. The first was Financials 101, led by EQT Ventures’s Global Rollout Partner Marnix van der Ploeg and Operating Partner Mats Magdesjö. This focused on how founders can master the fundamentals needed to survive among turbulence and, if the worst does happen and that cash runway runs out of road, protect themselves.

Marnix spoke at length about the importance of upleveling your balance sheet so you crack those vital KPIs, before Mats shed some light on the spreadsheet techniques needed to accurately forecast cash flow.

Marnix and Mats’s session has been put into words below.

Part 1: Upleveling your P&L, cash burn, and balance sheet in the face of adversity

Marnix van der Ploeg

As the Global Rollout Partner at EQT Ventures, Marnix works with portfolio companies to support them in setting up financial controls, reporting, and new market rollout. He employs his extensive experience in finance and operations to help founders get to the next level.

Many companies like to believe they have their financials in good shape. Their balance sheet, Profit & Loss (P&L) and cash flow forecast. But in reality, this often isn’t the case.

Most companies’ main focus is their P&L, but that focus nearly always seems to come at the expense of the other areas, no more so than their overall balance sheet. This is a mistake. Your balance sheet is just as important as your P&L. But where to start?

First off, examine your balance sheet on a monthly basis. Along with your leadership team, review cash liabilities, payables, loans and working capital. And don’t forget to factor in your off-balance sheet items too, especially those that might come into play if you need to start making cuts, like rental obligations or lay-off costs.

The next step is optimising your working capital — an absolute necessity in a downturn. This requires your finance team to understand your cash conversion cycle in immense detail so they can work out areas of opportunity. They should examine receivables, payables and inventory. Review payment terms and methods. All of this should go alongside a top-down assessment and improvement of your key KPIs.

As I said, many companies focus on their P&L but ask yourself: is my P&L actually telling me how my business is performing?

All too often, businesses only look at their top line. But you need to understand your revenue streams in detail. Think:

* How is booked, unearned and deferred revenue impacting it?

* When is everything being paid? A $100,000 a year contract is going to impact your P&L depending on when you receive it.

* Does your P&L give you an understanding of recurring and non-recurring revenue?

* How profitable is the revenue you generate? Do you make money per transaction?

* Are ingoings and outgoings allocated to the correct periods?

Accurate P&L leads to an accurate balance sheet which leads to accurate vital KPIs.

And in a downturn, there are potentially none more vital KPIs than your cashburn and cash runway. Your cash burn comes from today’s cash balance vs your cash balance at the end of the previous month. And your cash runway is your cash balance divided by your cash burn.

Monitoring these correctly means you can control how much capital you have left and accurately indicate what actions need to be taken.

But what happens if you can see the end of that runway and you’re on the brink of insolvency? Well, you have three options. The first two are an informal wind down or a formal, voluntary liquidation. These methods require a certain cash runway. Like I said, there’s a cost in laying-off people and paying off outstanding outgoings.

For those that can’t afford those costs, there’s the third option: bankruptcy or administration.

All of these come with their own regulatory implications. These differ from region to region, so make sure you understand them. But wherever you are, if you know that insolvency is a certainty and continue to work, you’re personally liable.

The preferred option, of course, is making sure you don’t become insolvent at all. But in turbulent times, you have to be prepared. This all starts with an accurate P&L, balance sheet and cash flow so you can make the right decision at the right moment.

Part 2: Forecasting cash flow

Mats Magdesjö

Before joining EQT Ventures, Mats worked as a consultant, supporting management on analytics strategy, and brings 15+ years of data analytics experience to the Advisory Team.

When it comes to forecasting cash flow, the spreadsheet is your friend. And in times like this, it’s on everyone –especially founders– to learn how to use a spreadsheet to model scenarios. Look, you don’t have to love the spreadsheet. I’ll be honest though, I do. I think you have to learn to see it as an opportunity to predict or, at least, model the future. Maybe then you’ll learn to love it like I do?

But to get started, just a few pointers on how to start modelling. First, make sure your assumptions are transparent. For example, if you make an assumption that you will improve your customer acquisition cost (CAC), make sure to visualize that or have it broken out in the model so that people can see that it’s changing.

Then go out into your business and talk to whoever’s doing marketing and get feedback on your assumptions. Keep iterating and ask every expert for input.

And then finally, extrapolate. In some ways, extrapolating is an awful art form because it can be abused in so many ways. But it’s a good way to actually visualize for yourself where you’ll end up. Say CAC is covered by the customer lifetime value (LTV), does it take 10 months? Or 18 months? That’s the kind of thing you’ll discover when you start using your model and extrapolating into the future and begin trying to visualize.

All of which is vital information when economic turbulence strikes.