In a high-growth company, cash flow is about much more than simply covering day-to-day expenses—it’s a critical factor in sustaining aggressive growth and scaling efforts.
High-growth companies are often in a phase of expansion or scaling, where growth takes precedence over near-term cash flow and profitability. It’s common for companies undergoing rapid growth to operate with a high burn rate, experiencing prolonged periods of net cash outflow before reaching cash flow neutrality or profitability.
Typically, this would result in the company needing to position itself for financing and also timing major capital projects to such financing. Cash flow management in this situation involves many moving parts and thus requires careful attention and strategic oversight from the executive team to navigate effectively.
Sources of Cash Flow Stress
Here are some common cash outlays of high-growth companies:
Capital Expenditures: High-growth companies often require large, upfront investments in physical infrastructure to support scaling. This includes expenditures on tangible assets such as manufacturing plants, equipment fleets, or construction projects like mines and oil wells. Capital expenditures often require large upfront investment and an extended period of time before the new business generates sufficient cash flow to break even on the cash outlay.
Intellectual Property & R&D: Investment in intangible assets, like research and development (R&D) and intellectual property (IP) creation, is also critical for high-growth companies in companies in software, pharmaceuticals, and other industries. This includes developing proprietary technology, software, or patents that can provide a competitive advantage. However, these R&D and IP investments require substantial funding long before they contribute to cash inflow.
Receivables: Revenue concentration, where a few large clients or an undiversified market base generate most of the income, increases cash flow risk. Delays or issues with major customers’ payments can create significant cash flow gaps, impacting the company’s ability to meet its obligations. This is especially common where market expansion or initial concept of a company hinges on a few large customers, further causing volatility in a company’s cash flow.
Scaling Costs: Scaling up brings increased fixed costs as the company expands capacity, whether by hiring, leasing more space, or increasing production capabilities through other means. There’s typically a lag before revenue catches up with these expenses, resulting in cash flow negativity, or “burn,” during the transition.
Debt Servicing: Many high-growth companies use debt financing to fund growth, as it’s non-dilutive and can be more accessible than equity. However, debt introduces obligations like regular interest payments, principal repayments, and compliance with maintenance covenants. This added complexity in managing cash flow requires balancing growth investments with debt obligations to avoid financial strain.
All Roads Lead to Financing
The solution to funding needs typically involves one of two events or some combination of both: (1) securing financing and (2) completing a liquidity event, such as a sale or merger.
A company that needs external funding and typically will have to manage potential investors:
- Positioning for Investors: Crafting and maintaining a compelling image and narrative to appeal to potential investors. Creating professional investor materials that present a clear picture of opportunity and value to the inventor community.
- Managing Cash Flow Timing: Aligning cash flow needs with anticipated funding to avoid cash shortages. Positioning the company to be able to “weather the storm” if needed if financing or certain positive events do not materialize as expected.
- Constructing a Specific Ask: Developing a clear and concrete funding request based on your company’s needs, with realistic and sustainable financing terms that align with the company’s cash requirements. Having a specific ask ready when communicating with investors and banks is crucial. It demonstrates a competent and well-prepped executive team with a focused mindset.
- Understanding Financing Offers: Existing ownership seeks the most favorable, non-dilutive financing options. Factors such as timing, investment structure, and control retention are all factors that will be brought up during negotiations, adding further complexity to managing a high-growth company’s finances.
- Executing Financings During “Market Windows”: For companies looking to finance through public markets, taking advantage of “market windows” during favourable market conditions and strong investor interest is crucial. Investor sentiment in the public equity and debt markets often ebbs and flows unpredictably, so it’s essential to be fully prepared to act quickly. Having all audits, documentation, and filings ready on short notice is necessary to secure financing before the window closes. This readiness can make the difference between successfully obtaining funding and missing out due to unforeseen market changes.
Navigating Competing and Intermingled Requirements From Various Parties
As you can see, successfully managing the cash position of a high-growth company involves many different parties, each with various requirements. This is where Catapult’s experienced CFO team can provide invaluable support:
- Near-Term Financial Budgeting: Developing a detailed financial budget to ensure the company meets immediate cash flow needs, avoiding short-term cash constraints.
- Cash Flow Modeling: Creating models that project the company’s financial position under various financing and capital expenditure scenarios, helping inform strategic decisions.
- Debt and Covenant Modelling: Calculating and modeling debt service and covenant compliance for companies with financial covenants or in debt financing discussions, ensuring alignment with lender requirements.
- Investor Materials and Presentations: Preparing polished investor presentations and effectively showcasing financial projections to position the company favorably with potential investors. Advising the executive team and board on a suitable financing request.
- Financing Terms Analysis: Analyzing and clarifying financing terms during negotiations. We evaluate aspects like dilution, interest costs, repayment schedules, and the impact of complex instruments (e.g., convertibles) to help you and the board assess each proposal’s effect on the company and choose the optimal financing option.
Catapult’s Fractional CFO Team Can Help You Now
Choosing a CFO is a difficult decision. For many high-growth companies, a full-time CFO may not be necessary, or suitable candidates may not have presented themselves. A part-time or fractional CFO can often be the ideal solution, providing the immediate expertise to manage complex financial situations.
At Catapult Group, our team of highly trained and experienced finance professionals has a consistent track record in supporting high-growth companies through these challenging phases. With a base in Vancouver, BC, Catapult Group has successfully guided over 50 clients with presence in more than 20 countries in the past five years. Let our Catapult Consulting team assist you in navigating your financial landscape with confidence.
