Managing Working Capital for Biotech and Deeptech: Grants and Milestone Payments

Biotech and Deeptech Working Capital: Grant and Milestone Management

Winning a major grant is a validation of your science and a critical infusion of non-dilutive capital. Yet, the operational reality quickly sets in. Supplier invoices for reagents and equipment arrive with 30-day terms, but the grant cash that pays for them is weeks, sometimes months, away. This is the grant-funded working capital gap, a primary source of cash flow stress for R&D-heavy biotech and deeptech startups. Without clear visibility into future experiment costs, it is easy to over-commit spend, turning a funding success into a potential runway crisis. Successfully managing grant funding isn't about accounting compliance alone; it's about building a financial engine that converts R&D progress into predictable cash flow. The question of how to manage grant funding and supplier payments in biotech startups is a matter of operational discipline, not just financial reporting.

Foundational Understanding: The Grant Reimbursement Lag

The core challenge of grant-based funding is that it is almost always reimbursable. You spend your own cash first, submit detailed proof of those expenses, and then wait to be paid back. The problem is the waiting. The typical grant reimbursement lag can be 30 to 90 days or more from the moment you submit your expense report. This delay directly impacts your working capital, the cash you need for day-to-day operations.

While you wait for reimbursement, you still need to make payroll, pay rent, and schedule payments for new supplier invoices. The cash lag becomes a primary operational risk when a single grant exceeds 25-30% of your company's monthly burn rate. At that point, the delayed reimbursement is large enough to create a significant cash shortfall, forcing difficult decisions about pausing critical experiments or seeking emergency financing. Understanding and quantifying this lag is the first step in building a resilient financial plan for your research project budgeting.

Pre-Award Setup: Building Your Financial Foundation

Before the first dollar of grant-related spending occurs, a robust financial framework must be in place. This proactive setup is what separates startups that struggle with compliance from those that get paid on time. The reality for most pre-seed to Series B companies is pragmatic: the finance function is often run by a founder or a part-time controller using tools like QuickBooks or Xero, not a full finance team. This makes a simple, scalable system essential.

Navigating Key Compliance Frameworks

For US companies managing federal grants from agencies like the NIH or NSF, all spending must follow cost principles defined in 2 CFR 200. This regulation states that to be allowable, costs must be Allocable, Reasonable, and Consistent. This means every expense must directly benefit the specific grant project, be priced fairly according to market rates, and be treated the same as any other similar cost in your organization. For companies operating under International Financial Reporting Standards (IFRS), common in the UK and Europe, the relevant standard for accounting for government grants is IAS 20. While the specifics differ, the underlying principle of transparent and justifiable cost allocation is the same.

Structuring Your Chart of Accounts for Biotech Grant Compliance

To effectively track grant-related expenses, you must adapt your accounting system. Instead of using a generic “R&D Expenses” account, create a grant-specific Chart of Accounts. This provides the necessary granularity for accurate reporting and seamless reimbursement claims.

In your accounting software, you can use dedicated features to tag every transaction to a specific grant. For US-based startups using QuickBooks, this is typically done with Classes. For those using Xero, Tracking Categories serve the same purpose. A well-structured setup might look like this:

6000 - R&D Expenses (Parent Account)
6010 - Grant A: Personnel
6020 - Grant A: Consumables
6030 - Grant A: Equipment
6040 - Grant A: Subcontractors

7000 - R&D Expenses (Parent Account for another project)
7010 - Grant B: Personnel
7020 - Grant B: Consumables

This structure ensures that every invoice and payroll run is coded correctly from day one. It prevents the frantic, end-of-quarter scramble to reclassify expenses, which is a common trigger for delayed milestone payouts and serious biotech grant compliance issues.

The Reimbursement Engine: From Expense to Cash-in-Bank

Think of your documentation and submission process as a cash-generating engine. Its efficiency directly determines your grant cash flow management timeline. The goal is to make reimbursement submissions so clean and auditable that they are approved without questions or delays. This requires a systematic approach to capturing and organizing documentation for every single expense.

This system serves one purpose: to link every dollar spent to the grant’s objectives with irrefutable proof. For US startups, this is how you demonstrate that costs are Allocable, Reasonable, and Consistent per 2 CFR 200. For UK and other international programs, the principles are functionally identical. The process begins the moment an invoice is received. When a supplier invoice arrives, it should immediately be tagged in your accounting software with the correct grant project code and expense category you created during the pre-award setup. Using automated accounts payable and receivable tools can further speed up data entry and future reconciliation.

A Scenario We Repeatedly See: Documenting an Equipment Purchase

The challenge of properly documenting a major equipment purchase is a common hurdle. To ensure a smooth reimbursement, a complete documentation package is not just helpful, it is necessary. It should include:

1. The Purchase Order: This shows intent and demonstrates that the item was ordered specifically for the grant's purpose.
2. The Supplier Invoice: This document must clearly itemize the equipment, its cost, and payment terms.
3. Proof of Payment: A redacted bank statement or credit card transaction record showing the exact cash outflow.
4. A Brief Memo: A simple, one-paragraph note, saved as a PDF with the other documents, explaining how this specific piece of equipment is essential for achieving a specific aim of the grant (e.g., "This high-throughput sequencer is required for Aim 1 of Grant XYZ.").

This bundle of documents, attached digitally to the transaction in your accounting software, creates a self-contained audit trail. When it’s time to file for reimbursement, you are not hunting for disparate pieces of information; you are simply running a report and exporting the pre-packaged proof.

Managing the Gap: Burn Rate Visibility and Cash Forecasting

Knowing you will be reimbursed eventually is not enough. To run your business effectively, you need to know precisely when that cash will likely arrive and how much capital you need to cover operations until it does. This requires moving beyond a simple burn rate calculation to a dynamic cash flow forecast. While burn rate tells you the monthly average of cash out, it fails to account for the lumpy, unpredictable timing of cash inflows from grants, a hallmark of deeptech funding timelines.

Implementing a 13-Week Cash Flow Forecast

For accurate modeling of cash movements, a 13-week cash flow forecast is the standard tool for operational finance. This forecast, often built in a spreadsheet, maps out all anticipated cash inflows and outflows on a weekly basis. Its power lies in forcing you to model the grant reimbursement lag realistically. For instance, if you submit a $50,000 reimbursement request this week, you should not model that cash as arriving for at least 4 to 12 weeks, directly reflecting the 30 to 90+ day lag.

This forecast provides true forward-looking visibility. You can see a projected cash low-point three weeks from now when a large supplier invoice is due but before a grant payment is expected to arrive. This advanced warning is critical for proactive supplier invoice scheduling. Armed with this information, you might negotiate slightly longer payment terms with a key vendor or strategically time a non-essential purchase for after the reimbursement hits the bank. For particularly large capital expenditures, supplier financing programs can also be a viable option. The 13-week forecast is the tool that prevents over-commitment of spending and helps you avoid the need for last-minute, emergency financing to bridge a predictable gap.

Milestone Payments: Managing 'Lumpy' R&D Funding Cycles

Beyond standard expense reimbursement, many grants are structured around large, milestone-based payments. These are particularly common in later-stage grants in both the UK and US. Securing these payments on time is less about transactional proof and more about narrative and trust. A milestone submission is not just a data dump of expenses. It is a progress report that demonstrates scientific advancement and builds confidence with your program officer. Missing or misclassified R&D expense documentation can still jeopardize this process, so the systems discussed earlier remain foundational for effective milestone payment tracking.

Building Trust Through Narrative and Communication

When preparing a milestone report, you are telling the story of your progress. Frame your data and results in the context of the objectives you laid out in the original proposal. Clearly show what was accomplished, what was learned, and how it aligns with the grant's overall goals. Proactive communication is also key. Do not wait until the submission deadline to update your program officer. A brief, informal email update a month or two prior can surface any potential concerns early, build rapport, and smooth the final approval process.

Even with a perfect submission, these payments are not instantaneous. A safe assumption for milestone payment approval and processing is a 30-45 day cycle after you submit the report. It is crucial to factor this delay into your 13-week cash flow forecast. By modeling this lag, you ensure that your operational planning for R&D funding cycles is based on a realistic cash-in-bank date, preventing the lumpy nature of milestone payments from causing unexpected liquidity crunches.

Practical Takeaways

For early-stage biotech and deeptech founders, managing grant funding is an active, operational discipline, not a passive, administrative task. The difference between a smooth R&D trajectory and a cash-strapped one often comes down to a few key practices.

First, build your financial infrastructure before the project begins. Implement a grant-specific Chart of Accounts in QuickBooks or Xero to ensure every expense is correctly categorized from the start. This simple step prevents major compliance headaches and reporting delays down the line.

Second, treat your reimbursement process like a machine. Systematize documentation at the point of transaction, creating a complete and easily accessible audit trail for every single cost. This transforms reimbursement from a periodic scramble into a predictable, efficient engine for generating cash flow.

Third, forecast your cash, not just your burn. A rolling 13-week cash flow forecast is essential for visualizing the impact of reimbursement and milestone payment lags. It allows you to anticipate shortfalls and proactively manage your supplier payments and other outflows.

Finally, communicate effectively. For milestone-based payments, a compelling narrative and proactive updates to your program officer build the trust needed for swift approvals. By embedding these financial disciplines into your operations, you can successfully navigate the complex deeptech funding timelines and turn your grant award into the strategic asset it was meant to be. Continue to explore strategies at the working capital optimisation hub.

Frequently Asked Questions

Q: What is the most common mistake startups make with grant accounting?
A: The most frequent error is failing to set up a grant-specific accounting structure from day one. Companies often co-mingle grant expenses with general R&D funds, leading to a difficult and time-consuming process of retroactively classifying costs, which delays reimbursement and increases audit risk.

Q: Can grant funds be used to cover overhead or indirect costs?
A: It depends entirely on the grant's terms. Many government grants, like those from the NIH, allow for a pre-negotiated Facilities & Administrative (F&A) rate to cover indirect costs. You must have this rate approved by the granting agency and track these costs carefully, as they are a key part of biotech grant compliance.

Q: How does supplier invoice scheduling help manage grant cash flow?
A: By using a 13-week cash flow forecast, you can anticipate when large grant reimbursements will arrive. This allows you to schedule payments for major supplier invoices to occur *after* your cash balance has been replenished, avoiding a temporary shortfall. You can sometimes negotiate payment terms with suppliers to align with your R&D funding cycles.