Cash Flow

Because equity was even cheaper.

The last five years created a perfect storm. Valuations exploded. P/E ratios hit levels we hadn’t seen since the dot-com bubble. Funding supply was abundant—SPACs, innovative convertible instruments, the crypto explosion. Competition for deals drove valuations higher, which meant venture-backed companies could raise more capital with less dilution.

Equity financing became cheaper than debt. That almost never happens.

I started digging into historical data, looking for other periods where both equity and debt financing were simultaneously cheap. I couldn’t find one. The cost of capital across most risk categories from 2016 through 2021 appears to be a historical anomaly—the bottom.

WACC (weighted average cost of capital) time series data from Seeking Alpha confirms this. The chart is stark. We just lived through the cheapest capital environment in modern history.

The ship has sailed.

In 2022, financing costs started climbing fast. Debt got expensive. Equity valuations corrected. The era of cheap, unlimited capital ended abruptly.

If your company is less than ten years old, you’ve never operated in an expensive capital environment. Congrats if you took advantage and built a cash cushion. But most didn’t. They optimized for revenue growth because that’s what got rewarded with unicorn valuations and easy follow-on rounds.

That playbook is dead.

Free cash flow is the new religion.

Companies must pivot—hard—toward positive free cash flow (FCF) or risk running out of runway in an environment where the next capital raise comes with massive dilution or doesn’t come at all.

FCF isn’t the same as net income. It adds back non-cash expenses like depreciation and amortization. It adjusts for capital expenditures, working capital changes, and actual cash in/out. It tells you whether your business generates cash or consumes it.

Companies with positive FCF can survive prolonged recessions, stagflation, and stricter financing conditions. They have options. They control their destiny.

Companies with negative FCF are on a timer. Once the current cash position evaporates, they’re at the mercy of investors who now have leverage and will extract painful terms.

How to get to positive FCF.

Reaching positive free cash flow requires looking at the entire financial picture—P&L, balance sheet, and cash flow statement. Here are tactical levers to pull:

1. Renegotiate payment terms.

Work with vendors and customers to adjust accounts payable and receivable terms. Extend terms with vendors. Reduce terms with customers—even if it means offering discounts or paying slightly more for faster payment.

With high inflation, minimizing net working capital needs is critical. Working capital is current liabilities minus current assets. If that balance tilts wrong, generous customer terms eat cash fast.

2. Build a money map.

Document every cash expenditure from the last twelve months. Rank by total expense. Categorize each as critical or non-critical to operating the business.

Pause or stop non-critical costs immediately. Renegotiate with your largest vendors—even small percentage reductions compound. Most vendors would rather keep you as a customer at a lower rate than lose you entirely.

3. Delay or reduce capital expenditures.

Pause all CapEx except investments that reduce operating costs within twelve months. Prioritize short-term break-even projects. Everything else can wait.

4. Shift from fixed to variable costs.

Variable cost structures let you flex based on business performance. It feels counterintuitive, but contractors can fill resource gaps as variable costs instead of fixed headcount. You pay for what you use, not what you forecasted six months ago.

5. Automate with performance-based deals.

Look for RPA (robotic process automation) opportunities, but negotiate performance-based payment models. If the RPA saves you $100K, pay a percentage of the savings instead of upfront service fees. Align vendor incentives with actual results.

6. Do less.

Everything has a cost—including strategic initiatives that sound important but don’t move the needle. If you have eight priorities, cut to four. Eliminate waste. Kill projects that don’t directly contribute to cash generation.

7. Cut the lavish stuff.

Company events, conventions, travel, office leases, furniture, team dinners—reduce or eliminate. This isn’t forever. But right now, survival matters more than culture perks.

8. Pull the hard levers.

Cost reduction, workforce right-sizing, price increases. These are pragmatic, painful levers. But they generate cash fast when you’re against the clock.

9. Secure a revolving line of credit.

Even if it’s expensive, a revolver acts as insurance during rough patches. Access to emergency cash can bridge working capital gaps and buy you time to execute a turnaround.

The companies that survive see downside clearly.

I watched the aftermath of the 2000 crash. The companies that survived—and even prospered—attacked worst-case scenarios with clear-eyed plans. They acknowledged downside risk and built strategies around it.

Today, many organizations are operating with a “this will pass” mentality. And sure, it will pass. Eventually. But does your company have the cash reserves to wait it out?

If the answer is no, shifting focus to free cash flow isn’t optional. It’s existential.

The takeaway.

The era of cheap, unlimited capital is over. Revenue growth at any cost doesn’t get rewarded anymore. Profitability matters. Cash generation matters. Survival matters.

If you’re still operating like it’s 2020, you’re burning runway faster than you realize. The next capital raise—if it comes—will be brutal.

Get to positive FCF. Or get comfortable with massive dilution and loss of control.

The choice is yours, but the clock is ticking.