Growing into Bankruptcy

“Growing into Bankruptcy” ⚡️ Beware of the “Cash Illusion” and deferred revenue liabilities.

As we dive headfirst into the new year, let’s change things up a bit, shall we? Every now and then, we’re spilling the beans on a particular mishap rather than just celebrating another success story.

So, picture this: your “As a Service” business is skyrocketing. Your sales team is on fire, landing clients left and right. You’re selling long-term contracts, billing upfront, cash is coming in, and the future is all bright? Well, hold onto your hats, because here comes the plot twist.

🚨 Pitfall Alert!

You can actually grow yourself into bankruptcy, even when your Profit & Loss statement is looking good. How? Those long-term client contracts with upfront payments might be a Trojan horse: cash upfront does not automatically mean a longer runway!

As you welcome all of those new clients, they have questions and demands. Suddenly, your client servicing team is overwhelmed with additional workload, and you need more staff to keep the clients happy. But be careful, you won’t see more cash from those clients until their contracts renew in several months, or even years. Time for a reality check on your servicing capacity and runway!

And here’s another twist in the plot – the revenue associated with your service needs to be spread out over the duration of the contract, creating a financial cliffhanger at year-end. The portion of revenue that is attributed to the succeeding year(s) needs to be deferred as liabilities that eat into your equity. This may result in an earlier than expected need of capital increases.

Und hier kommt eine weitere Wendung – die Einnahmen, die mit Ihrem Service verbunden sind, müssen über die Laufzeit des Vertrags verteilt werden, was am Jahresende zu einem finanziellen Cliffhanger führt. Der Teil der Einnahmen, der dem folgenden Jahr bzw. den folgenden Jahren zugerechnet wird, muss als Verbindlichkeiten abgegrenzt werden, die Ihr Eigenkapital belasten. Dies kann – früher als erwartet – zu einem Kapitalbedarf führen.

💡 Survival Tips.

  • Manage your liabilities by mixing in some shorter trial contracts to balance contract durations.

  • Embrace upselling and expansion revenue to keep the cash flowing.

  • Grow your client servicing team in line with your clients’ needs.

  • Billing tools and financial models offer insight into your optimal growth velocity and true funding need.

Rule of thumb – you don’t have enough client servicing capacity! You will need to hire one more client service pro for every set number of clients won. Beware of the scaling costs by reserving enough cash for it!

🛟 Need a lifeline? We’ve got your back!
Reach out for a chat on managing your runway and taming those scaling costs. Remember, every rollercoaster has its dips and turns – let’s ride it out together!