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• A 5-step approach for scenario planning to help companies, finance executives, and leaders adjust to the new normal

• How to extend your runway

• Why it’s best to know your spend inside out

This guide covers:

How Companies Can Extend Cash Runway

COVID-19 and the consequential effects of the economic downturn are the black swan events for 2020. Many companies have changed the way they operate. Organizations that were once against the remote working model are now fully distributed, disrupting the norm for what is yet to come. 

Forward-thinking finance leaders realize that going back ‘into the office’ is now wishful thinking, and the new normal will truly never be normal in the same way again. Most organizations are considering different workplace scenarios and what makes the most sense right now, in the future, and for their company: stay 100% distributed or transition to a hybrid model?

A 5-Step Approach to Scenario Planning in a Crisis

Download the rest of our guide to learn:

  • The remainder of our five-step process to scenario planning 
  • How to identify the right core scenarios to model and pitfalls to avoid 
  • Advice on creating a business contingency plan 
  • How to monitor and be ready to respond to different scenarios
  • Key strategies from Debbie Rosler, On-Demand CFO at Burkland & Associates, on extending cash runway
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According to a just-released study conducted by Nilly Essaides from The Hackett Group, the biggest disruption to finance operations was keeping up with the speed of change and responding to the rising demand for forward-looking information.

We outline four spend management strategies to help companies proactively revise spend controls and lockdown spending in our guide “Control in a Crisis”. 

Organizations should be open to using new models, methods, and tools for change management and evolve their planning process as new risks will emerge. The new normal has arrived, and it’s anybody's guess what the future will hold.

And... as Charles Darwin famously said, it is not the strongest who will survive, nor the most intelligent, but the ones most adaptable to change.

Why does this matter?

What’s going on for finance and operations these days?

Facing a prolonged period of uncertainty, finance executives are now embracing a more flexible planning process and investing in new tools to increase productivity. More importantly, CFOs and business leaders are now faced with the immediate challenge of accurate scenario planning to uphold fiscal sustainability and survival to maintain targeted runway and build contingencies.
They need new frameworks, new processes, and new tools to help them implement various scenarios to control spend and quickly adjust between different models.

"Scenario planning helps companies to navigate uncertainty and plan ahead so they can anticipate and quickly respond to changing landscapes.  While we are currently facing an economic downturn, there is a lot of uncertainty as to how deep the recession will be and how long it will last.  By planning ahead for a range of economic scenarios, companies can develop plans that respond to each of the landscapes to ensure they survive (or potentially even thrive)."

Creating a Scenario Planning Framework

There are many ways to identify the range of possible scenarios to maintain a sufficient cash runway. Top VC firm Sequoia Capital developed this decision matrix to outline potential strategies to counter each of the uncontrollable situations startups are facing during the pandemic.

A common frame of reference is to outline scenarios for a ‘worse case’, a ‘neutral’, and a ‘best case’, modeled against the expected duration of the uncontrollable event. In Sequoia’s matrix, different scenarios are based on assumptions on how long the lockdowns will last.
 
Superhuman, the popular email platform giving Gmail a run for its money, recently released a useful 
scenario-planning calculator. Companies can enter their cash balance and desired runway to calculate how much they must reduce burn by each year.
 
There are many templates available for scenario planning, but it is essential first to understand your company’s current position to most accurately plan for your unique case. 

How should companies plan for the new normal and extend the runway?

  1. Calculate the optimal runway that your company needs to maintain regular business operations and positive operational health.
  2. Identify cash burn and the key uncertainties that affect cash flow in a negative way.
  3. Bucket key uncertainties into scenarios and identify pivotal drivers.
  4. Craft a business contingency plan for each scenario.
  5. Reforecast and monitor each scenario using models such as waterfall analysis on a regular basis.

We recommend a five-step process to help CFOs scenario plan and budget for the future:

1. How to Extend Your Cash Runway

"The companies that survived the 2008 recession were the ones that cut expenses early and deep. It’s about survival again, not growth rates or market share. Cut expenses, extend runway, raise additional financing if ever you can – we don’t know when things will get back to normal so 18 to 24 months is your minimum target. "

When facing a downturn or a period of economic uncertainty, cash is definitely king.
 
There are differing opinions on how much runway companies should maintain, but according to AngelList, the standards are 
24, 36, or 48 months. According to the accounting experts at Burkland & Associates, a broad rule of thumb is to start planning for an immediate 18-24 month cash burn right after a capital raise.

"We are recommending at least 24 months of runway for all of our companies, preferably more. The reason for that is it could be tough to raise money. It goes from a four-week process for many people to a six-month process in terms of fundraising."

2. How to Adjust Your Burn and Revenue Forecast

After you have chosen the appropriate runway to maintain for your organization, adjust annual net burn so that runway is always at this level. Companies can reduce burn by growing revenue and reducing costs, but burn rates can also be affected by adding additional personnel or increasing marketing costs. Managing and controlling burn can be easier to manage when you have a spend management system in place, and a comprehensive approval process to catch spending before they hit accounts payable.
 
Reducing burn is often a challenging task for founders and CFOs, as startups still need to remain nimble and grow while being more fiscally responsible during times of crisis.

Revenue, COGS, operational costs, and personnel are four key levers that impact the burn rate. In times of a recession, organizations can only control everything related to cash outflows costs, personnel, and marketing.
 
Unfortunately, there is no silver bullet or one-sized approach that will work for all organizations. Here are some examples of compromises and tactics other companies have taken to mitigate these risks while avoiding personnel cuts:

  • Downsizing facilities and office space in preparation for a hybrid remote-work model
  • Reducing staffing hours and salaries instead of making headcount cuts
  • Moving previously contracted projects in-house to save costs
  • Reallocating tradeshow and travel budgets to revenue-generating activities 
  • Deferring costs and giving clients and customers different payment options to reduce churn 
  • Conducting a product/market fit score to gage product stickiness and requirements during times of downturn 
  • Carefully managing discretionary spending using spend management software

NOTE: THIS GUIDE WAS ORIGINALLY WRITTEN FOR INTERNATIONAL ACCOUNTING BULLETIN.

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