HIGH WYCOMBE, England, September 15, 2022 /PRNewswire/ — “Cash is king” is often cited as a rule of thumb for businesses, especially start-ups. But how have medical technology (MedTech) companies dealt with the past two years where clinical trials have slowed or stopped, electronics have been difficult to secure and issues such as Brexit have added further uncertainty?
Francois CooperCFO of Sky Medical Technology, outlines some of the processes and policies he brought to Sky Medical Technology to provide longer, more accurate and more sustainable insight into the company’s cash position and how the finance department has a key role to play in delivering services to valued stakeholders in MedTech.
The best ideas and the most innovative companies in the world fail if cash management is not at the heart of everything the company does. Every business – especially pre-revenue or early-revenue startups – needs to understand the concepts of cash burn rate and its impact on the company’s cash trail – the time remaining before cash is depleted.
This is never truer than in the medical technology (MedTech) industry. For many companies, the gap between concept and product can be measured in months – especially in the age of 3D printing, but in MedTech it can be years or even decades. Providing global healthcare systems with a new and innovative product is hard work. You must first persuade key clinicians that your product is worth considering and ask them to invest time and effort in understanding the product and its potential for patients. But this is only the first step.
MedTech companies will have to navigate use in small patient groups, efficacy trials, randomized controlled trials (RCTs), and regulatory and licensing issues. All of these risks are significant for MedTech companies. Typically, these companies have little control over the timing and outcomes of these processes, but each can cause significant delays – and delays are the enemy of money.
Running out of cash is bad news for a business for a more than obvious reason: it threatens the viability of the operation and the livelihoods of those in it. When cash is scarce, flexibility is also lost: the business cannot make the strategic investments it needs to thrive. Panic fundraising is one way to quickly destroy corporate valuations.
While it is certain that unforeseen delays and risks will materialize in any MedTech business, it is impossible to know what they will be and when they will occur. It makes sense to educate investors so that they understand and support the potential timelines and risks associated with the MedTech industry and accept that returns may take longer to achieve than with other industries. Open and continuous dialogue is essential: the more investors understand the real situation of the company, the more likely they are to be favorable when the inevitable delays materialize.
To give an example, during the pandemic, most ambulatory care facilities were closed for months, which impacted the speed of RCTs. If companies need to reach certain milestones to trigger the release of funding and this is related to the advancement of ECRs, it is important to know the delays in advance so that terms can be renegotiated or alternative funding can be made. be sought.
The finance function has an essential role to play here, not only as guardians of liquidity, but also in building a cross-company commitment to transparency in risk management. MedTech companies must constantly analyze the business and its environments to ensure that any potential risks and changes to a risk profile are identified and reported immediately so that the full impact on the cash trail is analyzed and acted upon. work quickly.
The power of rolling forecasts
We have found traditional annualized budgeting to be relatively worthless in the MedTech industry. These budgets are based on historical events driving current events and can be too rigid (especially in times of uncertainty), reducing creativity and responsiveness. Annualized budgeting is based on numbers gathered the previous year and often has little relevance to the current day.
At Sky Medical, we rely on an 18-24 month rolling forecasting process. This approach has allowed us to maintain control of cash flow even in unexpected times – such as the Covid pandemic and Brexit-related business risk. As uncertainties have increased, we have moved from quarterly to monthly updates. These are forwarded by the department heads and compiled and consolidated within the finance department. The review is not intended to pass judgment on how department heads spend the money. They are experts in their fields and will be judged on their performance based on the decisions they make. Instead, it allows finance to review forecasts with functional department heads to understand any changes and ask questions that can highlight if something was missed or mistimed.
Certainty through production
Even when MedTech companies have cleared regulatory and medical hurdles and transitioned to production, new changes and uncertainties must be considered. No business wants to tie up cash in an oversupply of components, but no business wants to be out of stock either. The recent shortage of electronic components is a good example where accurate forecasting can help provide a consistent supply in uncertain times – an especially important issue in an industry where continuity of supply is critical to patient well-being.
In reality, each part of the activity forecast is linked to others. The revenue forecast has an impact on the manufacturing forecast because it determines when the goods should be produced. Manufacturing forecasts impact revenue forecasts because they determine manufacturing capacity and component requirements. Regulations impact revenue – you can’t sell products that aren’t approved. Clinical trials impact marketing forecasts – as they determine the validity of product efficacy.
Collection – collection = money you keep
MedTech companies present a unique set of challenges, even in the start-up world. Startup tech companies can often get their start through tough times, but in MedTech there are high upfront costs and often a long road to profitability and shareholder returns.
By having a flexible mindset, one that doesn’t get bogged down in last year’s budget, people can collaborate more effectively to minimize risk and mitigate the resulting impact on cash flow. Making predictions is by no means easy – the only guarantee will be that the predictions will be wrong! However, it is critical to the process of negotiating the various issues that MedTech companies will face on the path to creating shareholder value.
About the Author
Francois Cooper is CFO of Sky Medical Technology and has over 15 years of experience in medical technology, pain relief and wound care. His experience in finance also extends to businesses ranging from SMEs to multinationals across Europe and the United States. He is a Chartered Accountant and holds an MBA from Manchester University.
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SOURCESky Medical Technology Ltd