The Flip side of Turning Cash Positive

Capillary CEO & Co-founder Aneesh Reddy shares the challenges faced by cash positive companies during the COVID pandemic.
 
BENGALURU, India - July 10, 2020 - PRLog -- To start off, I think Covid19 has hit cash positive/ profitable businesses hardest because when you are cash positive and profitable, your cash reserves would typically never be planned for zero cash flow scenarios. For startups that guzzle cash, most expenses get paid from investor funding so business cash flows aren't very material, and they typically have a lot of cash reserves. FY20 (April 2019 – March 2020) has been a monumental year for us. We went from a ~40% EBITDA loss/ Negative cash flows in Q4FY19 to our first ever EBITDA and Cash Positive Quarter in Q4FY20 (JFM). We were cash positive even after paying Venture debt principal and interest and working capital costs as well – cash positive to the dot.

We actually celebrated being cash positive on March 15th after we crossed that milestone. Given we were turning cash positive, we were comfortable with our cash reserves as our burn rate was consistently coming down. We were also working with our banking partners to extend our India working capital limits to cover our international receivables.

And then the lockdowns started

Things were going well for us until the mid of March, and then Covid-19 happened and one country after another went into lockdown. We thought we had a small advantage in that a part of our business came from China. But data for the month of Feb indicated a ~75% reduction in cash flows. And China wasn't showing any great signs of recovery even by mid-March.

In the middle of March, when India and a bunch of other countries in the Middle East and SEA announced lockdowns, we knew that the worst was upon us. We prepared for a crunch in cash flow without any visibility on the kind of churn we would see. Would some of our customers go bankrupt? Would we have big write-offs? We spoke to many people but no one had seen a nosedive like this ever.

When you make a plan, you keep a 10% – 15% buffer to compensate for the misses and plan for that much extra cash. However, in the worst case when the 10% cash burn climbs to 75%, it spells disaster for the business. For instance, if you had a runway of 12 months at 10% burn, you would have less than 2 months at 75% burn! (Looking back now, our cash flows in the 6 weeks from March 15th to May 1st fell by ~75%).

In moments of crisis, it's important for businesses to assume the worst and take hard calls.

For detailed insights visit https://www.capillarytech.com/blog/capillary/covid-reflections-the-flipside-of-turning-cash-positive/

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