Blaine Bertsch is the CEO of Dryrun, which helps businesses forecast cash flow, budgets, and sales scenarios in the cloud. We had a chance to speak with Blaine and hear his thoughts on how to handle cash flow, forecasting, and business funding in order to help small businesses operate smoothly and have the opportunity to grow and flourish.
Tell us a bit about yourself. Why did you decide to co-found Dryrun?
I'm a designer by trade and ran a small but growing business for over a decade before starting Dryrun. One of the greatest challenges I faced as we grew was understanding the current state of our finances while trying to predict where we were headed. Simply put, I wanted to know: Do I have enough money coming in to get me through this month, and do I have enough sales lined up to make sure we're profitable and can grow this year?
I found answering these questions to be a monumental task, since as soon as I could wrap my head around our current state, the problem would get bigger and the future a little murkier. In a way, this was a good problem to have since we were growing, but the risk grows right alongside the business. I was using spreadsheets on an almost daily basis. I had no formal financial training but simply had to learn, study, and address the issues on the fly.
My spreadsheets became more and more complicated and soon felt like a giant house of cards - one false move, an incorrect equation, or a missed piece of data, and the entire thing would come crashing down. It also took a considerable amount of my professional and personal time to configure and maintain this system to a useful degree of accuracy - and time, as you know, is in very short supply as a business owner. Even worse, the spreadsheets got so complicated that I was virtually the only one that could read them.
So, when I sold my company and was looking for a new opportunity, I kept coming back to this problem: how can I help small business owners deal with their operational and forward-looking finances in a straightforward and powerful way? After dozens of conversations with other business owners, the idea for Dryrun took shape.
What is the biggest problem for business owners regarding the tracking of cash flow?
The problems with managing cash flow can vary widely among different businesses and different business models. The biggest problem is putting your finger on the core issue you face and developing a process to tackle your specific issue with the least amount of time and energy.
For instance, in some businesses, the greatest issue they face is getting paid quickly, let alone on time. When cash flow is highly variable and consists of large invoices and differing payment terms while you're on the hunt for the "next job," it's absolutely essential to stay on top of accounts receivable, get sign-off fast, get invoices out immediately, and stay on top of overdue payments.
In other businesses, the big issue is with their bill payments. Maybe they are making large inventory purchases or buying materials to create their product. There is often a large outlay of cash and a long wait until the income starts flowing in from their sales. Understanding where their cash flow sits and ensuring they have the cash to make these critical purchases and then sustain them until the cash starts flowing in is critical.
What is your opinion on factoring to help facilitate cash flow and avoid shortfalls?
From a cash flow perspective, factoring can be a highly effective service to small businesses. In fact, some businesses simply couldn't survive or power their growth without it. That said, factoring does invariably impact the bottom line and in businesses with tight margins, the reduction in profit can be tough to take.
So it's important to evaluate it carefully in the context of each business. So forecast carefully, assess margins accurately, and ensure there's a contingency plan in place if the margin gets too tight.
What do many entrepreneurs and startup professionals have trouble with when it comes to business funding and/or cash flow?
The greatest issue I see is a blind spot when it comes to cash flow; it's the idea that "if I just work hard enough and keep business flowing through, things will sort themselves out." I call this philosophy the "seat of the pants" cash flow process. Of course, a blind spot in cash flow can lead to major crisis.
Time is your greatest ally. Identifying potential crises well ahead of time can give you lots of options while your head is still above the water. But more than that, even "healthy" businesses are doing themselves a major disservice when they aren't actively managing their cash flow and forecasting their sales. There is simply so much money lost through gaps and overlaps in business processes and operations. If business owners had an awareness of these "gaps and overlaps," they'd be easy to repair. The crazy part is that businesses can run this critical early-warning system, identify opportunities, and plan for efficient operations and growth with very little time dedicated to the task - and the payoff is simply huge.
How would you go about building a cash flow forecast for a new business which doesn't have any historical data to refer to?
Historical data is nice to have, but honestly it's not even that useful in many ways for established businesses. For small businesses, last year's revenue can be misleading and make owners too comfortable. Changes in the economy, new competition, new technology... any number of things can dramatically impact sales. It's essential to look forward and predict what those changes could be and how it could affect your business, not only regarding potentially weaker sales but also massive increases in sales. You need to be prepared to react in either case.
For a new business, the essential first step is to build a budget based on your actuals that is at least a year long in order to predict what it will cost to stay in business and give you some room to manage the unexpected. Based on that figure, you can set your revenue goals for the year. With that completed, start building out a cash flow forecast that takes into account your expenses from your budget and exactly when you will need to make those payments. Next, build out a sales forecast that meets the goals you set out. I recommend making best, worst, and most likely forecasts.
How will you get those sales? Build this forecast out before you commit another dollar to the business. Is this realistic? Can you gain those sales, pay your expenses, and make a profit? If you can't, then what's your contingency plan? Is it more money out of your pocket? It can be challenging for a new business to build out an accurate cash flow and sales forecast. But as you can see, new businesses need this action plan the most before they commit more of their time, energy, and money to the venture.
What guidelines should a business owner follow regarding the amount of money to allocate toward business growth versus backstopping or supporting cash flow?
The easy answer is that I recommend having a three-month safety net in place of either cash in the bank or at least come cash and a line of credit to make sure you're not working on the razor's edge.
The hard answer is that business growth can be complicated. Growth often costs a lot of money, whether it be more staff, more equipment, a large inventory purchase, or dealing with larger loan payments. Business growth nearly always carries with it a new level of risk and unknowns. Also note that the timing of growth is often based on opportunity, not just simply having cash in the account to facilitate the growth. So, having an accurate forecast of your finances is an absolute must to manage the growth opportunity smoothly, reduce the risk, and focus on the process instead of the pennies.
When (if ever) is it a good idea to seek outside funding to address cash flow problems or shortfalls?
Of course it is a good idea (in fact, it's often the only idea) to address cash flow problems in a business. Your lender can be your best friend in a crisis or to take advantage of an opportunity. However, make sure you know exactly what you are signing up for. Taking on outside funding means you need to be able to pay that money back. Is the funding to address a temporary issue or to finance growth? Or is it just a band-aid on a gaping wound? Building up debt in a failing enterprise is never a good idea.
In the future, what must small business owners and entrepreneurs do in order to succeed?
Knowledge is power in business. Of course, understanding and serving the needs of your customers is essential, and being the best at your core business needs to be your focus. Effectively managing and forecasting your finances is an essential part of the knowledge equation. With a firm grasp on the direction of your business, your ability to react to both crisis and opportunity becomes a major competitive advantage and can fuel your growth.
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