I was new (again). The company had raised a lot of money, and I was told we had a runway between two and three years. That was the first red flag. When your estimated runway has a 12-month margin of error, you don’t actually have a clue. And yes, this is more essential than building new models, defining metrics, or considering your evolution into becoming a 10x CFO.

I was the first senior finance hire, and the CEO told me after I started the biggest worry keeping her up at night was cash flow. This caught me off guard. We had a ton of cash in the bank. But once I dug in, I realized why: everything was based on projections, estimates, and assumptions. We did have a lot of cash, so the problem wasn’t urgent, but without a solid cash foundation everything felt “loose”. This is not another “slam on the brakes” article. It’s a focus on how to raise the landing gear on a plane taking off.

At first, I thought about tackling the problem the classic way: digging deep into the budget, conducting a line-by-line expense review, and building a full operational model. But, if our actual cash flow was in question, that would have led to a lot of excess information based on shaky foundations.

We start this series of articles by first getting a handle on the cash flow and runway.  This is the first actual ‘task’ I would recommend to any starting CFO. You should be able to estimate future-looking cash (3 months out) within 1%. Once you can prove this, you can build everything else from a strong base: scenario modeling, deep dives into burn, and structural cost optimizations.

Let's get to work:

1. Create an initial cash flow statement

Your typical balance sheet and income statement review does a poor job of showing you cash. Of course, you can make an indirect cash flow statement from the other two, but its reliance on backing out accrual entries obfuscates more than clarifies. Instead, you need to make a direct cash flow statement to see the cash in and cash out. To do so:

1. Ensure bank reconciliation to the cent. Yes, this means diving into spreadsheets or ERPs. While automation has improved this process, never assume everything ties out. Verify banks personally. Go back three months.

2. Extract all cash transactions. Pull all cash transactions from your ERP. So, anything that hits your bank accounts.

3. Sort the lists top-down. Quickly check the largest expenses and highest revenue sources to assess normality. No adjustments yet. Just familiarize yourself with the key figures.

4. Categorize transactions into high-level buckets. Break cash flow into four main categories: Income, Direct costs, Salaries, Expenses, and Other. Visualize this in a pie chart to prioritize.

5. Create the statement. Create a high level cash flow statement from categorizations that ends with a detailed summary of all cash spent and received totaled by month.

6. Run key ratios to identify gaps. Stay laser focused on cash. Calculate key metrics from your findings to give you a baseline unencumbered by dreams.

   1. MRR Cash Conversion: You should be realizing at least 80% of your MRR in cash each month whichever definition of ARR you use.

   2. Growth Rates: How is the cash incoming increasing each month? How is the cash outgoing increasing each month?

   3. Straight cash runway: Cash Balance / Monthly Cash Burn if all things stay the same. Ideally, you want 18 months+.

   4. Cash CAC Payback Period: last month CAC cash spending / next month new customer cash given

Don’t take shortcuts. Ensure your totals match what is literally written on the bank statement balance. These will typically look much more negative than your ‘SaaS Metrics.’ That’s fine. You need to know both to understand the reality of your company.

Tip: Move fast. Use AI models to categorize transactions quickly then review in batches. Focus on the biggest buckets, not the easiest.

2. Drill into the money coming in

Now, into the weeds. Look at the quality of your collections. Well-paying customers are the ultimate yardstick. To do so:

1. Line up customer MRR / Cash Owed (invoiced) / Cash Paid. This should be on one tab by every customer as a row with the last three months of those figures in different columns. Depending on your ARR calculation, cash owed may or may not equal your MRR.

2. Analyze the totals. You should sum each one of those columns to look at:

   1. If cash owed / MRR is less than 80% you have a discounting problem, an invoicing problem, or a revenue definition issue.

   2. If cash owed / cash paid is less than 95% you have a collection problem.

3. Chunk the issues. Dig into the particular customers this analysis flags. Ask the CS rep. Find any skeletons. Common buckets:

   1. Customers not paying at all: Are these really customers? If not, they shouldn’t be in any of your numbers.

   2. New customers that don’t pay for many months: This points to implementation issues.

   3. Usage based customers with major differences: There could be issues with expected usage of the platform.

   4. Good paying customers. These are your best customers.

   5. Data issues. There could be incorrect data entry or contract misinterpretations responsible for any discrepancies. Flag these.

4. Check the other stuff (optional). You can also look through payment channels to see if there are any issues, check out the receivables balance (classic), look at invoicing days to payment. But this should get to the root of your issues without getting distracted or ballooning the project.

5. Assign a team member to grind. Once you have done the work, put someone on your team in charge of collecting outstanding payments, tracking progress, and ensuring follow-ups happen on a regular basis. Don’t outsource this to CS as it's an uncomfortable and distracting conversation for them.

This is in the finance wheelhouse, so you need to own it. And, strangely, often you will be the one that cares about payments the most, so if you don’t put on the pressure, no one else will.

*Scroll below to see the full table

Tip: Put your business partner that is responsible for CS in charge of payment overviews. Most of the follow-ups should be automated, but their intersection at CS and Finance makes sure you are balancing payments with customer satisfaction.

3. Review the money going out

Next, you need to get a handle on money going out. I would recommend immediately running a CEO line-by-line review. But, if you want to get a handle on the full picture before doing so:

1. Get your last three months of expenses. Same as the cash in. This should be long enough to capture all of your quarterly payments.

2. Bucket into three categories. Salaries, recurring expenses (subscriptions/rent), and one-off expenses. Put these in a pie chart. This gives you a sense of your flexibility.

3. Split by team. Is this the ratio that embodies what you want to spend as a company? There are many frameworks for this that are out of the scope here.

4. Split by type. Yes! You can actually use the chart of accounts for something useful. Split the costs by the type of expense.

5. Create a reduction/investment list. Once you have sliced and diced all of your outgoing expenses, prepare a list of 10 things you could do to reduce cost and their repercussions. Prepare a list of 10 investment opportunities you could use to generate revenue. You should keep this list up-to-date with the CEO to show the choices you have to spend/decrease money.

At the end of the day, money going out is the one thing you have complete control over. As a finance leader, you need to know this perfectly. That is your main responsibility.

Tip: Put yourself on any payments emails so that you get every single bank transfer out, highest to lowest, every morning from the previous day and then the week. Spend 10 seconds reviewing. You will start to see the pulse of the business.

4. Make a 3 month projection

Now you’re ready to look forward. What will your cash balance be in three months? To do this, you’ll build upon what you already have (cash flow statement, detailed cash-in movements, and detailed cash-out movements) by:

1. Use your initial cash flow statement. Your next projected month should be the same as your last month of actuals. Start by assuming the next three months will be exactly the same as the last three.

2. Clearly list out every assumption that will alter your cash flow from last month.

   1. Estimate future cash in: Calculate this directly from your customer and MRR list. Be conservative and assume the pessimistic case. Cross-check against the % increase from the previous month. Take into account any quarterly timing differences.

   2. Estimate future cash out: Assume costs remain steady or increase based on hiring plans and budget changes.

   3. Ask around for any payments: It’s surprising how much past-looking statements miss about the future. Ask your executive team for any major one-off payments coming in the next three months.

3. Finalize the Model: Summarize the ins and outs for the next three months (month by month) to determine your final balance. You should be within 1% of this within three months barring any major changes that were unplanned.

Keep it simple. Stick to cash flow and avoid overcomplicating things until you have a solid baseline.

Tip: Have a team member paste the final cash balance every day into a spreadsheet (cash in, cash out, and cash balance) so you can monitor progress against estimates.

5. Model your runway

Now that you have your three-month projections, it’s time to model your runway. This is when you take a broader step back and review all available financial data. Ideally, your operational model, financial statements, and balance sheet. Here’s how:

1. Expand your direct cash flow statement. Take your three-month projections, tie the major lines to key variables (headcount, customers, ACV, etc) that you should have elsewhere.

2. Make conservative assumptions. If in doubt, always lean conservative on cash receipts and higher on expenses to protect the business. There is no benefit of assuming you have a longer runway than you do.

3. Link all financial statements. Project your balance sheet and income statement forward (a subject for another article). Then, create an indirect cash flow from those statements and compare them to your direct cash flow statement as a sanity check. They should be *very* close.

4. Use scenarios. This is the perfect time to apply scenario planning. Develop multiple runway scenarios to assess different potential impacts.

5. Finalize your calculations.  Finally, you are ready for showtime. Finalize the model and share it with the executive team. 

You need to own this model. You could ask the accounting team to update it or your FP&A team. But, you will be in the best seat to know what strategic changes will come down the line.

Tip: When making strategic decisions, always ask, “How much runway does this risk?” For example, “Should we pursue this new partnership if it costs us three months of runway?”

6. Maintain the runway model

The runway model determines how much time you have as a company before you go bankrupt, when you need to raise money, or how much cash you are able to build. It’s critical to stay on top of the details by publishing the model each month. Present the model next to your reduction/investment list each month. To do so:

1. Make it visible. Keep the runway number on the top of each monthly management review. Compare it to the baseline runway that you calculated in your initial stage, and understand the difference.

2. Make your investment/reduction list rock-solid:

   1. Investments. Prioritize investments that provide clear ROI and align with your runway strategy.

   2. Reductions. Identify areas where you can cut costs without compromising core operations.

   3. Financial levers. Consider financing options that may reduce profitability but increase short-term cash flow, such as receivables borrowing, BNPL (buy now, pay later), or extending payment terms. These are typically suboptimal if you have sufficient cash but can add several months of runway in a pinch.

3. Set automatic triggers for management. If the runway hits 12 months, trigger an immediate expense review; if it hits six months, initiate cost reductions.

4. Batch spending decisions weekly. When someone wants to spend more money, put it on the list next to the other opportunities. Is it a better opportunity than the others? Is it worth making reductions for?

By continuously evaluating these options and regularly monitoring cash flow, you maintain control over your finances and can make better growth decisions.

Tip: Spending is often a negotiation. When a team requests an additional budget, evaluate the opportunity against its potential return and impact on the runway.

In Conclusion

If you do all this, you will have a strong handle on your cash. From there, you can go ahead and build upon a strong foundation.