Financial strategy

Financial strategy#

Our financial strategy guides how we’ll make decisions that impact our finances. This includes our optimal burn rate and how we’ll prioritize different kinds of revenue streams.

Definitions#

Monthly recurring revenue

Revenue brought in through recurring service contracts. This is the primary non-confirmed revenue that we project into the future in our financial modeling.

Our budget projections model uses HubSpot deal data to project future revenue, which may include grant-funded service contracts alongside regular service contracts.

Cash on hand

The amount of disposable funds that we have in our CS&S accounts. This does not include expected revenue or expenses. We calculate this at the end of each month from CS&S’s accounting reports.

Monthly burn rate

monthly recurring revenue - monthly costs. This is the amount by which our cash-on-hand changes each month. See our budget projections for how we project future revenue using HubSpot deal data.

Runway

cash on hand / monthly burn rate. This is the number of months at our current burn rate before we run out of funds. If we know more about expected increases in funding, we can also calculate by projecting current numbers into the future and seeing when we hit $0.

Cycles of capacity growth#

We expect our runway to grow and shrink as we move between cycles of capacity growth and commitment growth.

If our runway is too long, it means we are not investing enough in our operations and under-achieving our impact. If our runway is too short, it means that we are running the risk that we’ll run out of funding. Here’s what these cycles should look like:

  1. Capacity growth. Invest to grow our capacity to serve, develop, and experiment. This will shorten our runway (by increasing our costs).

  2. Commitment growth. Invest in growing revenue via contracts and grants at a fixed capacity. This will lengthen our runway (by increasing our revenue).

Optimal runway#

Our goal is to keep our runway around 12 months, but to keep it roughly flat over time[1]. Here are the bounds for our optimal burn rate:

  • 24 months: 🚨Alarm bells! We are spending too little, we should hire or pay others for work.

  • 18 months: Focus on growing capacity. We can hire somebody without being too worried about finances.

  • 15 months: Sweet spot, this should be our average runway over time.

  • 12 months: Focus on growing revenue. We should only hire somebody if there’s an absolute need.

  • 9 months: 🚨Alarm bells! We are spending too much, we should focus on boosting revenue.

  • 3 months: 🚨🚨Extra alarm bells! Reduce capacity or wind-down operations. Unless more funding is imminent, we should use our funds to support team members as they search for other positions.

Balance of contract revenue vs. grants#

These are goals that we shoot for, and not necessarily reflective of current reality.

Most of our funding should come from recurring service fees. This is the most reliable source of income. It gives us a low-variance way to bring in funding and an easy way to demonstrate impact.

The majority of our recurring revenue should not come from grants. Recurring revenue should come from a combination of many contracts, not singular large contracts that will drop off all at once.

Service-focused grants sohuld support under-resourced communities. Grants that cover the costs of our hub service is a special case. We should treat them like service revenue as long as we have a model for how we’ll renew grant funds. They should particularly target communities that couldn’t pay on their own.

Non-service grants should be used to invest in new services or one-off improvements. Other grant opportunities should not go towards core operations that we must continue over time. We should treat them as temporary extra capacity to:

  • Make targeted improvements to our tools, processes, etc.

  • Prototype a new service or improvement that we wish to generate funds with in the future.

  • Provide crucial, temporary support to ourselves or another community.

Development contracts should be treated like grants. If we get a contract to perform some kind of development, we should think of it as a one-off source of funds, not recurring revenue.

Case study: how to decide whether to hire somebody#

As an example of using the above principles in action, here are a few questions we should ask when deciding whether to hire somebody new.

  • Do we have excess or insufficient capacity? Are we in a cycle where we wish to grow capacity and decrease stress on the team?

  • Is the area of expertise for this role the place where we need the most capacity?

  • Will this role grow our capacity in the area of highest need?

  • Will this role contribute to bringing in more revenue from 2i2c?[2] If so, we may update our budget projections before deciding on the financial impact of the hire.

  • Will hiring this role shorten our runway to less than 12 months? Assume it will take 3 months for this person to ramp-up and begin contributing at full capacity. So 12 months here is a reflection of our 9 month runway alarm window.

References#

See these research notes for where some of these ideas came from.