Your Company is Running Out of Cash. As the CFO, What Do You Do?

By Bob Finley

You’ve probably heard the description “battle hardened” applied to a colleague or even to yourself , but I believe that often there is no substitute for experience. One of my favorite quotes is “You will learn more about a person in six months of tough times than you will in five years of good times.”

This is a story about company running out of cash in tough times. A situation that came on quite suddenly which created an existential crisis, but also taught our management team valuable lessons.

Situation: Impending Acquisition – Revenue Shortfall

I was working as the CFO of a hardware company. We were closing in on the close of Q2. The previous few months had been filled with frenetic activity, as we had received a lucrative acquisition offer from a PE firm. Everyone at the company was excited but the folks from the PE firm were watching us closely to see if we would make our Q2 numbers.

I had counseled the CEO and CRO to support my Q2 revenue and profitability forecasts at a level where we were very confident that we would nail them. Hitting your numbers is a well-known litmus test for companies in the latter stages of being acquired. Nail them and the acquisition goes through. Miss them and be prepared to see the deal re-traded, or disappear altogether.

As we headed into the last week of Q2, I stayed in close touch with our CRO, Jen. I wanted to make sure she had all the support she needed (including last-minute adjustments in pricing and terms) so she and her team could meet the Q2 revenue target. Our conversations went something like this:

Monday:

Bob: “Hi Jen, how’s the quarter looking? Anything I can do to help?”

Jen: “Fine, just fine. $10M for sure. Thanks for the offer, I think we’re good.”

Tuesday:

Bob: “Jen, how are things shaping up? Can I do anything to help you or your team?”

Jen: “No, we’re fine. Thanks for the offer. Ten million should be in the bag.”

Wednesday, last day of Q2:

Bob: “Jen, big day today! You said $5M would come in. Is that still in the cards?”

Jen: “Ahhh! Looks like we may have a few deals slipping. We could be a little light. I’m checking.”

And just like that, Q2 turned into a total disaster. We missed by $4M, or 40% off. The acquisition offer vaporized, Jen was fired by the CEO and our company was going to run out of cash.

For months, my Accounting and FP&A Team had been running a 13-week cash forecast and they had warned me we would get down to a low point of $2M. Now that turned into negative $2M.

I could see from the updated 13-week cash forecast that we would run out of cash before Labor Day. We had to prevent that. The stakes were high: our investors had invested $100 million in the Company and if we ran out of cash, their investment would go up in smoke.

Taking Action: A Creative Cashflow Solution

As I reviewed our options with the CEO, I pointed out that we had a line of credit secured by A/Rs. The problem was it had a maximum $5M borrowing base. Q3 was our year-end and we expected to close $20M or more in new business by that point. If I could get a temporary increase in our borrowing base, it would allow us to sail past the negative cash point around Labor Day.

Although we did not need to report Q2 to our lender for 30 days, we needed to put things in place to avoid the cash shortfall ASAP. I called my counterpart at the lender, Phil, and offered to give him an update on Q2 and an outlook for Q3.

My team and I worked through the weekend putting together a detailed presentation, showing what deals had slipped temporarily, which deals pushed out past Q3, and which deals were closed out and effectively lost. We also put together a detailed Q3 Pipeline review and a Cash Forecast that was based on the new data. We checked and double-checked all our assumptions. This would be a tough negotiation as the lender had a reputation for diligence when it came to dealmaking. We had one opportunity to make this cashflow plan happen. There would be no second chances.

On the day of the meeting, I walked Phil through the deck. When I got to the cash forecast slide, he said “You’re going to run out of money.”

I jumped in immediately. “Phil, I came here today to partner with you to put together a structure that will stop just that situation from occurring. We are asking for some additional borrowing capacity, temporary of course, to get us past our cash low point.”

Phil responded. “You missed Q2. No way I’m going to risk lending you more money. Come back after Q3 and we can talk then.”

His reaction was what I expected. I had prepared for this.

We looked at each other for what seemed like an eternity, then I smiled and said, “Phil, I can’t leave this room till we make a deal.”

Phil gave me his best poker face. He was good.

I said, “So, Phil… we’re projecting $20M in Q3 bookings. What we would like to do is temporarily increase our borrowing base from $5M to $10M. Only in August and September. Then it goes back down to $5M.

Phil said, “You must be high.”

“No, here’s the way I look at it. You normally cap our borrowing base at 80% of A/R. If we do $20M in bookings by year end and borrow $10M, we’re only borrowing 50% of or eligible A/Rs.”

Phil said, “So what?”

“So…since this is a modification to our existing LSA (Loan and Security Agreement), you probably want to charge a modification fee. Right?”

Phil said, “Ok. For a fee of $25K, I might consider your proposal.”

“And since our borrowing base is going up, you probably want to increase our interest rate by 200 basis points. You can go to your Credit Committee and say you are proposing a temporary arrangement that is actually safer than most A/R lines (50% borrowed vs. 80%), that generates immediate fee income and also generates incremental interest income. What’s not to like about that?”

A smile started to form on his face. He said, “I like the way you think. Let me see what I can do.”

Result: A Successful Outcome for the Company, Board and Investors

A week later we got our borrowing base increased and for a small amount of fees and interest, we averted a cashflow disaster.

Our CEO was elated, the Board was happy, and we made it through year end.

We’re looking a gray clouds on the horizon in 2022 when many companies may be facing cash crunch situations just like this one, especially if revenue forecasts prove too optimistic. I hope this story shows that with creative solutions, experienced finance teams can avert cash shortfalls and stay on plan to meet their strategic objectives.

Postscript: Phil and I still have lunch periodically, a friendship forged out of respect and partnership during tough times which resulted in a win-win, for both of us.