Way to measure when spending should be phased back

What is the best way to measure when staff investment should be phased back

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I work for a licence based business who receive 12 months income in advance which funds working capital without the need for borrowing.
We are entering a rapid growth phase which involves significant staff investment resulting in negative reserves which are forecast to increase during this phase however our cash balance is forecast to remain positive due to phasing of invoicing.
What metrics could be used to measure when spending should be phased back as it is difficult to explain negative reserves must be curtailed when there is an ongoing healthy bank balance, so a measurement to help us explain this would be helpful.

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By WhichTyler
18th Mar 2021 12:51

You need to do a cashflow and balance sheet forecast for your particular situation to demonstrate that, even if you are bs insolvent, that you can reasonably expect to meet your liabilities as they fall due

But also consider what would happen if you couldn't deliver (for any reason, maybe outside your control) and everyone wanted a refund...

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By paul.benny
18th Mar 2021 13:21

You also need to look at what revenue and margin your spend is delivering/supporting. It's impossible to be more specific without more knowledge of your business.

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By tom123
18th Mar 2021 13:29

So, your income (such as it is) should be phased over the months.

You report a cash flow forecast for whatever time period until you expect things to pick up. Monthly, or weekly if needed.

Presumably you already have a budget acknowledging this series of events.

With regard to bringing people in - if the revenue or output per hour exceeds the cost, then that is a reason to do it.

Presumably your project has some kind of quantitative element - like, say, 10,000 hours of programming or something.

You do scenarios with fewer staff and longer time period, or more staff and quicker.

You need to prepare models that are flexible - so Excel etc is probably the tool, if you don't have better tools.

If whoever is the 'big cheese' does not really understand the black hole you will be in for a while you have bigger problems.

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By Paul Crowley
18th Mar 2021 13:55

Best is to figure out whether you are making a profit or a loss
Also helpful to use plain English and drop the managementspeak jargon if you want people to pay attention and understand what you are trying to say

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Replying to Paul Crowley:
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By tom123
18th Mar 2021 14:25

Did someone say "cash burn"..

A long way away from the welding and forklift world I inhabit..

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By I'msorryIhaven'taclue
18th Mar 2021 14:21

If no portion of the 12 months up front payment is repayable should the customer cancel, then for management accounts purposes you could try presenting the advance payments element as a debtor (Dr debtors Cr bank in your B.S. and at the end of each month Dr bank Cr debtors 1/12th). That way you're releasing funds to the bank and hence to the cash-flow actuals as they're earned, which should help align them to staff and other costs. And the director gets to see a more meaningful bank balance.

If on the other hand partial refunds are made for cancellations by customers then you might try removing the advance elements of the 12 months' payments from sales, and recognise a 1/12th element each month. (So Dr Sales Cr Bank on your B.S. and Dr Bank Cr sales a 1/12th element each month going forward). That adjustment of the timing of revenue recognition would stop the director from counting his chickens, so to speak, and maybe give him insightful reports and metrics.

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