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Cash flow: a 2-minute guide for startups
 

Understanding cash flow: Part 1

 
 
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Key information and guidance on cash flow. 

Read time: 2 minutes

  • Create a cash flow forecast in year one
  • Don’t underestimate the impact of poor cash flow
  • Assess your risks and build an emergency fund 
  • Seek advice to boost your cash flow confidence 

 

Find the rest of the series here:
 

‘Turnover is vanity, profit is sanity, but cash is reality’ 

Most businesses do not fail because of profit margins or sales volumes but because they have run out of cash. Cash is one of the most important numbers you should focus on as a measure of your venture’s viability. The art of cash flow planning is used to predict and manage cash pinch points which may impact your business.

What is cash flow?

Cash flow is the movement of money in and out of a business. The key function of cash flow is to help business owners, investors and lenders understand a company’s finances. It is an essential tool for understanding liquidity, health and performance. The term ‘inflows’ is used to describe money coming into the business, while ‘outflows’ is for money going out.

Why is it important?

Business leaders who understand cash flow can make better informed decisions about where to take their business next—whether that’s identifying areas of overspend, reinvesting in the business or seeking investment.

How does it differ from profitability?

Cash flow and profit differ in that profit shows how much money remains after outflows have been paid. Cash flow shows you the macro view of how money is flowing in and out of a business. Profit can be a good indicator of the health of a business but it does not show the full picture of the business at a given time.

For example, a business might have a healthy cash flow but not be profitable. An investor might look at the cash flow of a business and take the view that it is well-positioned for future growth. Profit is a good indicator of the success of a business at this moment, while cash flow may be a better tool for determining the long-term financial outlook of a business.
 

How is it measured?

A cash flow statement is used to measure a company’s inflows and outflows over a set period. The cash flow statement details the operational, investment and financial activities of a business, providing a snapshot of the company’s health at a certain point in time. One of the most important items on the cash flow statement is the bottom line entry which shows the net increase or decrease in cash over a given time. 

Another useful measure is the cash flow forecast — a projection of cash flow over a designated period. This can help business owners understand when they might need financial support. Cash flow forecasts may end up being inaccurate, but they serve as a useful model for maintaining the health of a company. 

What affects cash flow?

Cash flow can be affected by many things. Here are five of the most common items that can negatively impact your cash flow.  

  • Excessive reinvestment
  • Unexpected events
  • High overhead costs
  • Overspend
  • Bookkeeping mistakes

What are the consequences of poor cash flow?

Poor cash flow can have a profound effect on your business. If cash isn’t available, founders may be forced to seek additional lines of credit. Another major concern is missed opportunities. All of this and more can restrict growth, which in can in turn have a knock-on effect on your business trajectory, employee morale and more. 
 

How can you make sure your startup’s cash flow is positive?

Start by preparing a cash flow forecast. Take additional steps to ensure it is realistic. Leave ample room for unexpected costs. Set dates and targets and re-evaluate regularly. Don’t let invoices pile up. Chase payments as often possible without harming customer relationships. Take charge of your expenses to boost your cash flow. External experts can help you to reduce monthly bills. Use lean operating methodology (see more here) to ensure your startup is as efficient as possible.

Conquering cash flow

 

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