How does re:cap help companies with their cash balance?

A company wants to avoid falling below or maintain a specific cash balance

Let's first examine the initial scenario. A company has set various requirements regarding its cash balance:

• I'd like to have a positive cash balance.
• I want my cash balance to always have a certain amount as a minimum.

These objectives raise the question: How do I finance my business plan under these conditions?

Companies plan their cash flow based on their business plan. They forecast their future earnings and expenditures to determine their financial needs. This sets the stage for planning their financing tactics, whether it's timing, amounts, or the instruments used.

The dance of cash balance and financing

Now, companies can utilize various sources of capital for financing. For some financing projects, debt may be more suitable, while for others, equity may be preferable.

If a company opts for debt and wants to use an alternative financing instrument as offered by re:cap, re:cap first analyzes its business plan in conjunction with the initial cash balance objectives. From there, a funding plan is developed. 

How does this work?

How capital amount and timing impact cash balance 

Various capital needs are outlined in the business plan, each occurring at specific points in time. The company requires additional funds at these junctures. Without them, not only can the goals of the cash balance be jeopardized, but the company as a whole may come under pressure due to the imbalance in the cash balance.

Let's take a look at the cash flow plan of a sample company. In its business plan, it has identified a funding need of €2 million over 12 months.

• July: €500,000
• November: €500,000
• March: €500,000
• July: €500,000
  

The company has two options:

1. It can acquire one large sum at once. However, this almost always leads to higher capital costs. The company doesn't need the total sum immediately but rather selectively over eighteen months.
2. It can opt for a flexible financing model, providing capital at the appropriate times. The company utilizes the funds directly, avoiding a constant drain on its account.
   

While re:cap caters to both options, the latter often proves more cost-effective. With flexible financing, companies access capital as needed, maintaining a healthy cash balance without draining their accounts.

With the second option, companies don't receive a large funding all at once. re:cap provides a flexible financing line, allowing the company to access different amounts of capital at different times, depending on their funding plan. This enables companies to acquire capital cost-effectively.

The company's funding profile indicates its financing limit (the maximum amount of capital the company can receive based on its ARR) as well as its utilization of re:cap. 

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With this approach, the timing and amount of funding are tailored to the business plan and the current company's development. The revolving financing volume decreases or increases according to the company’s needs. 

Thus, re:cap combines two aspects: flexibility and long-term stability.

Flexible and long-term financing for an ideal cash balance

Debt funding from re:cap is flexible. Companies can determine every month how much capital they need. However, the financing plan is not rigid. It is adjustable to new business developments, investment opportunities, or market conditions. Especially for early-stage companies, it's crucial not to commit to fixed financing but to stay flexible and decide when and how much capital they need.

On the other hand, re:cap can be used long-term. Companies can repay it over five years – and choose their grace period flexibly.

Let's consider an example with a grace period of 12 months. The company repays its funding over a four-year term. After six months of repayment, an opportunity for growth arises. The company wants to invest. With other debt instruments, investment and repayment would burden the cash balance. With re:cap, the company can suspend its repayment, invest, and simultaneously maintain its aimed cash balance.

This flexibility enables companies to achieve an ideal cash balance without risking unnecessary capital costs and simultaneously invest in growth initiatives. 

What is the cash balance?

Cash balance refers to the amount of cash available to a company, including short-term bank balances and deposits. An optimized cash balance is crucial for the operational continuity of a business, covering expenses such as salaries, rent, or payments to service providers.

Objectives of cash balance

Cash balance is a critical factor in the financial planning of companies. Typically, firms require sufficient capital for three key areas:

• Covering operational costs
• Financing investments
• Hedging against uncertainties
  

Maintaining an adequate cash balance ensures that companies remain agile and that revenues and expenses are in a healthy balance. The definition of a "good" cash balance varies depending on the company's stage, business plan, and capital structure.

Costs of cash balance

However, having too much cash at hand also has its downsides. For instance, if companies raise too much money in a financing round, capital costs increase. Capital costs are typically higher for equity financing compared to debt financing.

While having a surplus of funds provides security, ideally, companies should deploy capital immediately. To achieve this, they need a well-defined business plan and cash flow forecasting to determine their capital needs over time.

Approaches to cash balance

Every company has individual capital needs. Some companies are risk-averse. They prefer to maintain higher cash reserves for added security. In contrast, others may adopt a more aggressive approach, preferring to keep less cash at hand in their balance sheets.

Generally, companies maintain a certain cash balance to cover ongoing expenses in case of emergencies, such as unpaid invoices from customers. Cash balance is often compared to total or fixed costs in such situations.

Factors to determine the optimal cash balance

In this context, re:cap analyzes the relationship between cash balance and burn rate, as well as its proportion to total costs. These metrics serve as indicators of what an ideal cash balance might look like.

However, defining an optimal cash balance depends on the individual characteristics of each company. Key questions for further clarification may include:

• How do I finance my total capital requirements?
• What is an appropriate cash balance for companies with a specific cost structure?
• What is my total capital requirement?
• What is my capital requirement at each point in time?
• What is my burn rate?

Conclusion: tailore your cash balance and financing to your needs

Cash balance isn't just about keeping the lights on. It's about covering operational costs, fueling investments, and buffering against uncertainties. Finding the right balance ensures agility and stability, aligning revenues with expenses for a healthy bottom line.

Cash balance is one of the most critical parameters for companies. Planning ahead and being prepared for uncertain times is crucial, as having €0 in the bank is rarely a good idea. Additionally, constantly hovering around this value seldom contributes to positive company development. Instead, companies should be proactive rather than reactive.

However, what constitutes an adequate or ideal cash balance must be defined by each company individually. While having cash at hand is advantageous, having too much can also be detrimental. Therefore, flexible and long-term financial planning is essential, allowing for adaptation to new situations and corporate goals, while providing the necessary flexibility for companies.