Stress Testing and Cash Runway

How do you know what actions you need to take to survive this crisis? The answer is, you won't know until you've modelled them out.

Cash is king during this time and if you’re not in one of the high growth benefiting sectors (e.g. Healthtech / Edtech / Zoom), proving underlying health, unit economics and profitability, rather than topline revenue growth, is the short- (and potentially mid-) term focus of most investors looking at your business.

Stress testing

The key is to perform multiple scenario analysis cases to understand how much your runway needs to be extended. If you’re not in one of the key sectors listed earlier, you're going to need to be very prudent with the assumptions used in your financial model and forecasts.

The below outlines some suggestions to display this prudence and helps build credibility with investors by displaying that you're cognizant of the current situation, the turmoil in the market, and the effect that it has on your business. Claiming that you're completely shielded from the current economic climate is akin to saying that you have no competitors, and therefore is unlikely to be taken well by investors assessing your plan.

Increasing cash runway falls into 1 of 3 buckets; increase revenue, cut expenses or find investment. It’s also important to consider your own focus during this time, what do you want your company to have achieved, or be in a position to do after the lockdown has ended and things are looking slightly rosier?

Some high-level examples of stress testing are listed below, what happens to your cash position and ability to meet future cash outflows if you do the following?

Revenue

If you take your foot off the gas with building pipeline and succeeding with your current customers, you'll inevitably have no leads once the market picks up.

• New customers generated

The purse strings on budgets have been pulled tighter and whether you're B2B or B2C, acquiring new paying customers will be harder than it previously was. What is the effect on your projections if you acquire 10% to 20% fewer clients per month?

• Churn

What if you were to lose more customers than you expected previously? Depending on your sector, this could be a minor +5% to +10% but for badly hit sectors this could be up to +20% to +50%

• ARR expansion

What if you are not able to up-sell any new features or justify higher pricing in your contract renewals?

• Discounting

What if you have to offer higher discounting [+5 / 10%] to attract new clients and renew existing clients?

• Accounts receivable days

What if your clients take 30 days longer than usual to pay? If they take 60 can you still make payroll? What about 90?

• Supply chain

What if one of your suppliers ceases to operate? Do you have alternative suppliers lined up? Have you tried other geographies and methods of moving goods to where they need to be?

• Channel partners

What if one of your indirect distribution partners goes under? How will you sell? Do you have alternative channel partners lined up?

Expenses

Negotiate EVERYTHING. Your suppliers will be in a similar position to you, especially your office which is currently empty, and if you manage to shave a few % points off each expense then it can rack up to an extra few weeks or months of cash runway.

• Employees

The furlough scheme has given grants up to 80% to keep your employees on your books. However once furloughed, they cannot work, and therefore to continue driving growth, you'll need to keep them on your books. What effect does a blanket 20% reduction (correlating with furlough reductions) in pay look like across your workforce? What if you capped every employee (including yourself and management) at the £2.5k threshold?

Offer equity options to retain your superstar employees in lieu of cash, this helps imply that you’re all “in this together”. Seedlegals have written a detailed blog on this, so check that out.

• General / Office expenses

General suppliers such as landlords are under a lot of pressure and are likely to offer discounted prices. Although employees will generally be your main expense, what is the effect of decreasing general expenses by 5% to 10% (assuming you’re negotiating!)?

• Accounts payable days

If you're strapped for cash, speak to your creditors in advance. In the current climate, what happens to your cashflow position if your accounts payable are up to 30, 60 maybe 90 days?

Funding

The below summarises the basic 3 sources; equity, debt, and grants. Check out the linked article for specific information on the various sources of funding by type and geography, with helpful links and additional information.

> #Founders - Sources of funding during the COVID era

If you're going for equity, check out the following article on how to pitch remotely.

> #Founders - How to pitch your #startup remotely to investors

Don’t fear a flat round and don’t be precious of all the milestones you’ve hit since your last funding round. Also down rounds are certainly better than hamstringing yourself by laying off the great team of ambitious people you need to keep innovating and hit the ground running when the situation is looking slightly rosier than it does now.

Focus

Pipeline has to be maintained, there’s no point in taking your foot fully off the gas in terms of building new leads and relationships as you want to go into the post-COVID world with a stacked pipeline of new opportunities.

Take the opportunity to reassess and prioritise your tech roadmap (and check out some of the available innovation grants listed in the COVID - Sources of funding blog), do you have a module that can assist in remote work? Is there a feature your clients have been asking for for a long time but you’ve never had the time to implement it?

Get in touch if you’d like support with your financial modelling, assumptions used, or to discuss your Next Round of funding!