ExpertCEO

We are a small business with annual sales of ~$3M. Over last few years we have been growing very fast and focused heavily on growth. Lately we started seeing longer payment terms. There are also concerns that some customers may not make through the downturn. Among our friends, we reminded each other that cash is the king.

My question is that how much cash reserve we should keep in the bank (not counting receivables)? 3 months? 6 months? Thank you.

Receivables are not cash :)

We have seen similar trends with other customers as well. We are a self funded company and are working towards having 6+ months of cash on hand with a longer term (By July) of having 12 months of cash.

Everyone i know is seeing longer payment terms so you are not alone. If you are selling to a bunch of startups, then 6 months may not be sufficient. Most of our companies that aren't yet profitable are assuming new cash isn't available in 2009 and are planning to have runway through mid 2010 at flat revenue plans from 2008.

Our investors are saying that you must have 9 months to 1 year of cash reserves. We have more than that but still look to deploy some of this cash to invest for growth in 2009. Part of this philosophy is based on the fact that our revenue revolves around federal spending AND our revenue is diversified--no customer accounts for more than 13% of total revenue. Therefore, we look at cash scenarios based on growth, being "flat" and in a steep decline (50%). We then look at adjusting spending 3 months out making sure the cash "moving average" never dips below 12 months.

3 - 6 - 12 months - wow? I think we're talking about two different things here.

1. How many months/years before I need to raise capital OR cash low point in the model.

2. Once we reach cash breakeven, how many months of Cash and AR backed debt should we have so that we don't become insolvent if we fall on temporary hard times.

For the first question IMHO, the more the better. I'd personally like to see at least 1 year but prefer 18 months.

For the second, it's dependent on your business model (SaaS vs Perpetual) and business maturity. For us we model, about 2 months in cash at break even with about 6 months of available equity as a backstop from our current syndicate.

First questions are (1) are you cashflow positive on your planned/forecast sales and (2) how much confidence do you have in your forecasted sales.

I think for revenue-free companies or companies where revenue is highly unpredictable, I like having many quarters of life based on my burn rate and my existing cash balance.

The issue is, IMHO, as you get bigger this gets harder to do and becomes an impractical constraint. For example, consider a $10M/quarter in revenues business -- should it have $60M in the bank? Probably not -- unless doing $0 is a realistic possibility for a few quarters in a row is a realistic possibility.

So my short answer is, as you get revenues the better question is "how many quarters of life" should I have in various scenarios. To me, if you can model a big, improbably (but non-zero) negative surprise, make cuts in response, and end up on a new, lowered run-rate without running out of cash, then you're OK.

So switching from quarters-of-burn thinking to scenario modeling. My 2 cents.

I have $22M revenue and $10M cash. You cannot have enough. More importantly I will be working very hard not to burn any cash during the next 12-24 months.

Cash is king, and in this environment I agree with Cisco's Chambers' quote in a recent WSJ article: "Cash is king, queen, and the royal family [in a recession]." A really strong cash position not only allows you to survive a prolonged downturn, it permits aggressive moves when others are weak, whether in M&A or taking share or any other strategic investment when prices are very attractive. So I tend to prefer at least 18 months of cash, even for younger companies, if possible. I'm reminded of an old story about the early days at Microsoft where Gates and Ballmer made a pact that they'd hoard at least a year's worth of cash so they could survive even with zero revenue. That may sound conservative but this environment shows what happens to companies with thin balance sheets.

We're a mid-sized ($40m), private venture-backed SaaS company; we restructured last year to turn towards profitability (which we achieved in Q4), and I cannot tell you how pleasant it is to not worry about fundraising in this environment and instead focus 100% on customers, how best to manage cash flows on top of a healthy balance sheet, and how to manage our growth. I like the sound of the phrase "infinite runway."

I think it depends on the reliability of your revenue stream. We are on a subscription model with a very sticky product. Revenue is not very concentrated in just a few customers but spread among 350.

I put as much cash as I can into growth. I don't maintain anywhere near 2 quarters of revenue in cash. So far, so good. We have maintained a steady cash balances for the last 6 quarters or so.