Managing Cash Flow and Expenses in Life Sciences
In this article:
- The Importance of R&D Tax Credits and Financial Planning
- Best Practices, Budgeting, Technology, and Vendor Terms
- Accounting Clean-Up for Improved Financial Management
- How We Help
Managing cash flow presents ongoing challenges for those in the life sciences, particularly those navigating pre-clinical research and early clinical stages. With significant resources devoted to research and development (R&D), precise cash tracking across R&D and general and administrative (G&A) categories is essential for sustaining growth and demonstrating financial responsibility. Distinguishing between R&D and G&A reflects a company’s ability to allocate funds efficiently. This distinction not only supports financial transparency but also builds stakeholder confidence in which areas of the business the company is expanding. While R&D spend must be meticulously tracked to ensure proper alignment with clinical programs and research objectives, G&A captures broader operational costs such as legal, regulatory, and administrative expenses.
For companies navigating clinical milestones such as trials and regulatory submissions, proper forecasting and the alignment of funding with these stages is crucial to avoid delays and ensure seamless progress. For those without consistent revenue streams, it is even more critical to understand actual cash availability. While adherence to Generally Accepted Accounting Principles (U.S. GAAP) is required for most life sciences companies, maintenance of rolling cash flow forecasts can be imperative for management to have a real-time snapshot of liquidity and cash flow. Rolling cash flow forecasts provide a continuous and updated picture of cash inflows and outflows, helping companies make informed decisions about investments, manage liquidity risks, and ensure they have sufficient funds to reach critical milestones. Without these insights, businesses risk overspending, delaying milestones, or even losing investor trust. Clear budget-versus-actual tracking helps companies make smart decisions and achieve their R&D and operational goals. Likewise, planning for clinical milestones helps avoid financial bottlenecks, ensuring funds are available when needed most for critical research stages.
The Importance of R&D Tax Credits and Financial Planning
As a company grows, it may become eligible for R&D tax credits. R&D tax credits can significantly impact the cash flows of life sciences companies by providing substantial financial relief and enhancing liquidity. These credits help companies offset a portion of their research and development expenses, reducing their overall tax liabilities. This is especially true for newly created companies, who may apply the credit against certain payroll tax expenses.
For companies eligible to benefit from the payroll tax offset, the credit can immediately free up cash that can be reinvested into further R&D activities, accelerating innovation and development cycles. To fully capitalize on these benefits, clients must maintain detailed records of tracking qualifying expenses including contractor fees and research-related supplies. AAFCPAs’ tax consulting team helps clients navigate the complexities of R&D tax credits, ensuring they capture every eligible tax-saving opportunity while maintaining compliance. A lack of proper tracking not only undermines financial opportunities but also risks disqualification during audits or tax credit applications. This underscores the broader importance of financial planning that aligns with clinical milestones and funding cycles.
Best Practices, Budgeting, Technology, and Vendor Terms
A best practice for calculating rolling cash flows involves using historical data to predict future performance. Start by setting clear goals and targets for your forecast, such as planning for growth or reducing liquidity risk. Regularly update the forecast to reflect the latest financial data, ensuring it remains accurate and relevant. Incorporate key performance drivers, such as sales projections and operational expenses, to create a dynamic model that adapts to changing conditions. This method helps life sciences companies stay agile and prepared for future financial challenges.
Technology can play an essential role in improving cash management. Financial tools, such as budgeting software and forecasting platforms, deliver real-time insights. These systems streamline processes, enabling companies to allocate resources more efficiently and track expenses with greater accuracy.
The more robust financial planning and analysis platforms support better decision-making by integrating budgeting, forecasting, and financial reporting. This integration ensures smarter tracking of both R&D and G&A expenses, allowing for greater financial visibility and control.
Collaboration across departments is key to improving budgeting accuracy. By involving finance teams, R&D department leads, and senior leadership, companies can align their budgeting with real-time operational demands, milestones, and resource availability. This unified approach ensures financial and clinical priorities are aligned, resulting in more effective budgeting and cash flow management.
In addition, implementing clear vendor terms, such as net 30 or net 60, strengthens financial stability by smoothing cash outflows. When paired with proactive cash flow monitoring and strategic financial planning, these measures help reduce the risk of premature cash burn and keep operational momentum steady.
Accounting Clean-Up for Improved Financial Management
Many life sciences companies face challenges with messy or incomplete financial records, particularly in their early stages. As historical and accurate financial reporting is required to calculate rolling cash flows, it is important to have accurate books and records. AAFCPAs advises that clients address these issues proactively, as disorganized books may hinder access to critical financial insights and delay eligibility for benefits such as R&D tax credits. Clean-up efforts often involve setting up proper accounting and expense management systems, ensuring accurate tracking of R&D and G&A expenses, and implementing robust processes for financial reporting. Beyond clean-up, a well-structured financial system is essential for tracking expenses correctly and generating real-time reports that support strategic decision-making.
Accounting clean-up not only supports compliance but also prepares businesses for audits and investor inquiries, building stakeholder confidence. With an integrated approach to financial management, companies can maintain accurate records, monitor cash flow in real time, and adapt quickly to operational needs. By organizing financial data and aligning systems with operational needs, companies can better understand their cash flow, allocate resources efficiently, and plan for growth.
How We Help
Managing cash flow effectively is critical to organizational growth and innovation. AAFCPAs delivers tailored financial guidance to help companies in the life science space track R&D and G&A expenses accurately, forecast future cash needs, secure valuable tax credits, and maintain transparency with stakeholders. With advanced reporting and financial tools, we ensure your financial data is reliable, timely, and easy to understand.
Our team helps optimize vendor terms, navigate tax incentives, and plan for key clinical milestones, so you can stay focused on advancing your mission. We help ensure you get the most out of your systems through integrations and recommend alternatives or add-ons where appropriate to help streamline processes, enable real-time insights, and foster collaboration. With a practical approach and deep industry expertise, AAFCPAs provides the clarity and support you need to make informed decisions and thrive in a competitive landscape.
If you have questions, please contact Ashleigh Marks, CPA, Consulting CFO at 774.512.4136 or amarks@nullaafcpa.com, Destiny J. Flood, CPA, Partner, Commercial Outsourced Accounting & Fractional CFO at 774.512.4151 or dflood@nullaafcpa.com—or your AAFCPAs Partner.
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