The initial years of running a start-up are a challenging time for any founder. There’s the excitement of creating your business idea and getting it up and running. But the importance of a rock-solid financial foundations cannot be over-emphasized.
No matter why you’ve decided to start a business, there will always be one goal that you’ll share with every other business owner; to generate income.
The problem, however, is that income alone doesn’t really do much to demonstrate success. Instead, it can sometimes be more beneficial to look at cash flow, both in and out, as a whole.
WHAT IS CASH FLOW?
Cash flow measures how much money is moving into and out of your business during a specific period of time.
Businesses bring in money through sales, returns on investments, and from loans and investments – cash flowing in. Businesses also spend money on supplies and services, as well as utilities, taxes, loan payments and so on— cash flowing out.
Cash flow is measured by comparing how much money flows into a business during a certain period of time compared to how much money flows out of that business during that same period. That is,
Cash received – Cash spent = Net cash flow.
If your net cash flow number is positive, your business is cash flow positive and accumulating cash.
If your net cash flow number is negative, your business is cash flow negative and you are ending the month with less cash than you started with.
How to Create a Cash Flow Statement
The cash flow statement is divided into three sections:
1. Operating Activities—this records the movement of cash from business activities, like sales and purchases of goods/services.
2. Investing Activities—all transactions regarding sale/purchase of long-term assets are usually what make up this section.
3. Financing Activities—this section can cover anything from transactions with creditors, investments in stocks etc
A cash flow statement combines these three sections into a simple form that suggests the company’s overall balance.
The accuracy of your cash flow statement depends upon your astute bookkeeping.
As your startup becomes profitable and grows, it is at a risk of cash flow problems and can find itself facing insolvency when it’s on the way to success.
So what are the steps to protect your business from a cash flow crisis?
1. Prepare detailed cash flow projections, not just budgets – while your budget might tell you that you can expect to make a profit, your cash flow projection should be able to tell you if you have cash in hand to meet a particular direct debit
2. Aim to maintain a cash cushion – If your cash flow suggests that there is a crisis looming, you should take steps immediately. If you need to borrow to have a cash cushion on hand, then do so. Paying unnecessary interest is preferable to going out of business
3. Try to get paid faster – overdue invoices are the biggest danger to any company, so you should take every possible step to deal with delinquent payers.
4. Pay suppliers later – paying your own bills later can give you a huge amount of breathing space, consider renegotiating new terms
5. Control your expenses – Reducing your expenses is another very effective way of boosting your cash flow. consider lower rents, lower utility bills, reduce redundancy and so on.
As a startup, it’s tempting to get caught up in income alone. After all, income is a good indicator of your reach. Income isn’t always a good way to analyse when it comes to looking at financial success and outlook. Cash flow can be much more valuable.