Cash Management for CFOs in Survival Mode

Preserving cash is one of the most important jobs of a CFO, especially during a challenging economic climate like the one companies are facing in 2022. Without sufficient cash reserves or access to reasonable financing, CFOs often have to make tough decisions around reductions in force (RIFs) and other cost-cutting measures to extend the company’s runaway. 

In part one of a three-part series on Cash Management for CFOs in The Circle, we asked three former CFOs to share their scar tissue from keeping their companies afloat during prior economic crises: David Faugno, former CFO of Barracuda Networks and Qualtrics; Lee Kirkpatrick, former CFO of Twilio; and David Oppenheimer, former CFO of Udemy.

Here are some of their key pieces of advice for CFOs on planning and operating during market volatility, executing RIFs, and looking for other ways to cut costs and extend runway:

Act Early and Decisively

One of the biggest mistakes a CFO can make is waiting for the market to turn before pivoting into survival mode:

“Things change much faster than expected. The longer you wait to hope things get better, the less optionality you have to take actions that get you from where you are to where you ultimately need to be.” – David Faugno, former CFO of Barracuda Networks and Qualtrics

CFOs can start by pivoting away from the annual plans they developed in late 2021 to more dynamic forecasting and cash management strategies aligning those with the rest of the executive team. Based on prior financial crises, CFOs should assume they will be managing through several quarters of unfavorable market and fundraising conditions; therefore, it’s essential to think longer-term when devising their cash preservation strategy. 

Forecast Cash Flows With Extreme Fidelity

As a company’s cash runway approaches 12 months, CFOs must maintain a detailed analysis around how much cash is flowing in and out of the business:

“In these scenarios, CFOs tend to focus on the cost line. But you must be very aware of your receivables and future cash flows from customers. Just as you are looking to cut certain expenses, your customers may be considering terminating their contracts with your company in order to reduce their own burn rate.” – David Oppenheimer, former CFO of Udemy.

Forecasting customer churn may require CFOs to partner with their sales teams to segment the customer base and create multiple churn scenarios measuring the impact on annual revenue.

CFOs also need to be very aware of any fiduciary responsibilities that need to be met, such as loan covenants, employee severance packages, or lease obligations. Understanding when you will become insolvent can help identify backsolve methods to ensure you don’t bounce payroll checks. 

Balance Growth With Contraction

Knowing where and how much to reduce total spending during a market downturn will depend significantly on where the company is in the growth and product lifecycle. Earlier stage companies that haven’t yet achieved product-market fit tend to cut back considerably on sales and marketing and general and administrative costs. However, CFOs may not want to sacrifice growth or market share if a company has good product-market fit and strong unit economics. In those cases, raising capital to support growth can be the right decision, even if it’s at a lower valuation with greater dilution. 

“It’s easy to fixate on a great valuation or not allowing for incremental dilution, but I would look closely at getting capital to sustain growth if you have great unit economics. Giving up market share and scale can be a lot worse than dilution. In the context of all that, you want to keep your eye on the prize and play to win while going through these tough times.” – Lee Kirkpatrick, former CFO of Twilio.

The same principle applies to internal investment in the business or products. While it’s important to curb spending, establishing a more conservative payback period can help companies vet suitable investments and align priorities. One way to do that is by filtering out company investments with payback periods longer than two years.

With RIFs, Be Transparent and Don’t Overpromise

RIFs are sometimes a necessary cost-cutting maneuver for companies in survival mode. Reducing headcount can save the company money, but keep in mind the total cost of the RIF, including severance packages and PTO accruals that need to be paid out. 

CFOs must also be discerning about the number of employees included in a RIF. Letting go of too few employees could necessitate doing another RIF down the road, which can significantly damage employee morale. Alternatively, cutting too many employees can create challenges for backfilling roles in today’s competitive talent market.

Our CFO experts agree that communication is one of the most critical aspects of a RIF. It’s essential to treat those impacted with respect and acknowledge that it can be a challenging experience for the entire company. Being transparent with employees can go a long way toward building and maintaining trust and confidence in leadership. Conversely, making false promises or commitments about future RIFs can get an executive in hot water if they ultimately have to go back on their word.

Remember That (Almost) Everything is Negotiable

Clamping down early on discretionary spending like travel and entertainment is often an essential cost-saving strategy. Don’t assume everyone in the organization will exercise the same level of frugality; in times of austerity, it’s up to the CFO to set a precedent around cost-cutting and ensure that there’s alignment up and down the organization. If necessary, CFOs may want to tighten up the approval process for discretionary spending and new customer contracts.

CFOs should also consider renegotiating and, if necessary, terminating external business obligations such as vendor contracts or lease agreements. It’s always an awkward conversation but starting the dialogue early is critical, as is leveraging any credibility capital the company has with a particular vendor or partner. Not every vendor, partner, or landlord will agree to a payment reduction or extension, but if the alternative is the company becoming insolvent, there may be room for flexibility. “When you’re in survival mode, you must take the approach that everything is negotiable,” said David Faugno.

Think About the Financing Path Forward

In the early stages of survival mode, it’s critical to align the spending strategy to the company’s financing goals. There are three critical reasons for this:

1. The closer you get to running out of money, the less leverage you have to negotiate fundraising terms. One of the first questions investors will ask during market downturns is the path to break-even. If a CFO doesn’t have a good answer for that, or the company’s financials don’t give investors confidence, a company may have fewer financing options.
2. CFOs will want to know early on if they have the financial backing of their insiders (existing investors). Having those conversations with investors early and identifying whether there’s a backstop if the company starts to get “too close to the sun” can help the CFO plan accordingly and ensure there are no misalignments.
3. If a company is looking at potentially raising money in a down round, understanding the impact across the shareholder base can help a CFO prepare accordingly. CFOs can start thinking about the impact on the 409A, when an option repricing makes sense, and whether key talent has enough upside to remain engaged and invested in the company. Moreover, CFOs can start to position the down round internally to avoid fear and panic.

Companies with solid unit economics and growth traction might also use the early stages of cash planning to consider whether there is a path to self-sufficiency. For instance, if a company has enough retention within a key customer cohort, it may allow them to run lean enough not to have to raise additional capital. 

Similarly, venture debt can be an alternative means of financing for some companies, though typically, it’s the last resort. Suppose a company does have to raise debt. In that case, it’s essential to communicate with the debt provider to understand what latitude there will be in terms of renegotiations or getting a covenant waiver as the company gets closer to running out of money.

The Takeaway

As we enter challenging economic times, CFOs should hope for the best but plan for the worst. A methodical, financing-based spending strategy mixed with diligent financial forecasting and aggressive cost-cutting can help a CFO extend their runway and stay prepared for unexpected bumps in the road.

Downturns are an opportunity for the CFO to lead and help get the company back on track. The best CFOs project calm and confidence while being purposeful with their actions rather than reactive. 

Stay tuned for part two of our Cash Management series. If you’re a CFO looking to connect with other growth-stage leaders on current challenges and long-term strategies, apply to join The Circle.