Scaling on Your Terms: A Founder's Guide to Cash Leverage

Everyone talks about scaling. It’s a big deal to be able to say you’ve scaled to $ millions and hundreds, or more, customers. Who hasn’t seen “experience scaling from 1 to 1,000” on a job description? Scaling gets a lot of attention because, obviously, it’s a function of growth. 

So why isn’t it as simple as  S = fX, where x is growth? 

Because scaling isn’t always simple, linear, clear or straightforward. Layer on the strategic aspect of scaling, and the “when to & how much” complexity soars. 

If cash in the seed stage is survival fuel, then cash after the seed stage is scaling fuel. Having enough cash gives you time. Time gives you leverage, and leverage makes those scaling decisions a whole lot less stressful. 

Here are some tools to gain that leverage.

Plan Forward, Not Backward

Post seed stage a rolling 6-18 month forecast is needed. It should cover:

• Revenue (new, expansion, renewals and churn)

• Headcount and hiring 

• COGS & OPEX including marketing programs

• Software subscription spend and any overhead

The forecast has to be flexible enough to change quickly. It should also be light enough to be updated quickly. Make the updates monthly and always compare against actuals. Major variances either mean a bad planning assumption, or an operational problem, or more likely a combination of both. Use the opportunity to fix things quickly. If the forecasting accuracy isn’t there, it will never feel like the right time to make a scaling decision.

Master Your Burn Rates

Gross and operation burn rates are important. But scaling also needs efficiency. Knowing how much cash it takes to acquire a new customer, or ARR is an excellent gauge. A burn multiple (Net Burn / Net New ARR) of <1 is excellent. 1 - 2.5 is good to risky. Anything above 2.5 is unsustainable.

Get Real About When Cash Actually Arrives

A big mistake founders make is assuming revenue = cash. For a lot of reasons, this isn’t the case. Think about the timing between signing a closed deal and receiving payment:

• The larger the deal, the longer the sales cycle

• Large customers generally dictate payment terms without negotiation. It’s not unusual to see 60 or even 90 day payment terms at the enterprise level.

• Your contractors and vendors however send their invoices net 30 or even due upon receipt.

There are a few ways to manage this:

• Automate invoicing

• Offer annual prepayment discounts 

Getting a customer to pay earlier than later can act as a mini fundraise and extend runway.

Raise Capital From a Position of Strength

Ideally there’s 9-12 months of runway when the fundraise process begins. By this time the business is shifting away from experiments and showing evidence of repeatable growth. Both of which give investors confidence and shifts leverage to founders.

The situation to avoid is having to fundraise under pressure. Waiting until there’s less than 6 months of runway shifts leverage to investors.

Scaling successfully requires a strategic mindset and execution. That execution is directly related to cash management and in turn leverage. When you’re doing it right, scaling decisions come naturally and without a lot of stress. The need to continually scale up ideally never ends; which wouldn’t be a bad problem to have.