The Day 1 Cash Gap

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by a searcher from Princeton University
in Livingston, NJ 07039, USA

1yr ago

The Day 1 Cash Gap

How do you estimate the Cash Gap in the firstredacteddays of ownership? When I issue LOIs I ask for target Working Capital (e.g., Account Receivables and Inventory). If all goes well: - Account Receivables becomes cash inredacteddays (depending on terms) - Inventory becomes cash inredacteddays - Work in Progress becomes cash inredacteddays But, I need cash to make payroll, pay rent, pay insurance for the first 1-2 months. This can either be cash I bring or a credit line (eg SBA) but how do I determine how much? - Do you just look at the cash currently on the Balance Sheet? - Do I take fixed expenses plus COGS divided by 12? Would love the communities thoughts.

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reply by an investor 1yr ago
from Columbia University in Fairfax, VA, USA

^redacted‌ Fixed Expenses, definitely. COGS will depend on how it's incurred: If COGS turns over quickly (e.g., subcontractors or just-in-time inventory), you may not need to reserve much cash for it upfront. But it's important to understand your Days Sales Outstanding (DSO). Here's why: Even if COGS is flexible, a long DSO means you're waiting to get paid. For example, if you charge project costs to a credit card but customers pay you 90+ days later, that timing gap can strain cash. And if the business requires inventory to be purchased weeks or months in advance, then yes... including a working capital buffer to cover those upfront COGS is definitely a prudent thing to do.

reply by a professional 1yr ago
from Biola University in Escondido, CA, USA

Great questions! I would do a 90 day cashflow report of Sales/Revenue minus gross and opex costs. This should give you a clear understanding of cash needed to fund the gap. Its important to factor in payment terms for A/R and A/P see how long or short your cash cycle is. I hope this fellow sojourners's experience is helpful!