The Importance of Cash Flow for a Start-Up Business

Startups disrupt industries and revolutionize the way we do things. But like any other business, startups face challenges when it comes to finances. Cash flow plays an integral role in ensuring that a new business is sustainable.

To understand the importance of cash flow for start up business, let’s look at what a cash flow forecast is, how it’s calculated and when to create forecasts.

A cash flow forecast is an estimate of the cash flows going in and out of a business over a specified period of time. It gives businesses an idea of how much cash they will have in the future or if they’ll run out.

• Cash inflows are the cash that’s coming into your business. These include payments, investments, financing, external funding or savings interest. Your cash inflows let you know how much cash you have and can use for expenditures to keep your business running.

• Cash outflows are the cash that’s going out of your business. These expenditures can include employee compensation, raw or stock materials, rent, utilities and other operating expenses.

If you have more cash coming in to your business than going out, your cash flow is positive. Conversely, your cash flow will be negative if you’re spending more than you’re generating.

An accurate cash flow forecast for start up business can help:

• Predict how much cash the business will have in the near future
• Allow companies to make decisions now to prevent cash shortages in the future
• Make smart decisions that can help keep the business running efficiently

Cash flow forecasts can cover a wide range of time periods, from 30 days to a year or more.

Cash flow is important for every start up business because it helps you understand the financial health of your business.

Cash flow is a measurement of how much cash your business is generating and how much it’s spending. It’s also a measure of performance and can quickly tell you whether your business is moving in the right direction.

If a start-up isn’t monitoring its cash flow, it can quickly:

• Spend more money than it has
• Run out of cash
• Find itself unable to continue operations

If you’re not managing or monitoring your cash flow, you won’t know whether your business is generating enough money to keep your operations going and cover expenses. For example, you may not be able to pay staff, or secure materials or supplies. In severe cases, start-ups have to shut down because they simply don’t have enough cash to maintain operations.

The goal is to ensure that you have more money coming in than going out to keep positive cash flow. When your cash flow is positive, your start-up will have the money to:

• Improve operations
• Increase investments
• Stock up
• Hire more staff
• Expand your business

It’s important to note that it’s really common for start-ups to have negative cash flow in their early stages. However, negative cash flow should only be temporary, and the goal is to increase funding and sales to avoid running out of cash entirely.

To calculate cash flow, most start-ups create a cash flow statement. The calculations are simple:

• Cash from your operating activities +(-) the cash from your investments +(-) the cash from your financing activities + your beginning cash balance = your cash flow

The goal is to add or subtract the cash from your operating, financing and investing activities to figure out your current cash flow.

• Operating activities refer to the cash you use to run your business
• Financing activities refers to the cash from loans or capital contributions made by owners to reduce your loan balances
• Investing activities refers to the cash used to invest in assets

Other methods of calculating cash flow include:

• Free cash flow: Net income + depreciation/amortization - your change in working capital – your capital expenditures = free cash flow
• Operating cash flow: Operating income + depreciation – taxes + the change in your working capital = operating cash flow

A cash flow statement for start up business is a financial statement that summarizes the movement of cash into and out of a company. It’s a measurement of well the startup’s performance and ability to cover its operating expenses and debt.

A start-up's cash flow statement supports its income statement and balance sheet. As discussed earlier, cash flow statements cover three main areas:

• Operating activities
• Financing activities
• Investing activities

Start-ups can use their cash flow statements to analyze:

• How well operations are running
• Where money is coming from
• How money is being spent

Investors and lenders will want to look at these statements to determine whether the start-up is in a financial position to cover its expenses.

When Should A Startup Make A Cash Flow Statement?

Start-ups that are just in the initial stages of launching may wonder whether they need to make a cash flow statement or when to begin creating them. New companies have very little or no revenue. Cash typically comes from capital injected by owners or investors.

Because the business likely isn’t generating much or very little revenue, it’s even more important to monitor its cash outflows.

Creating cash flow statements allows you to track your cash outflows and even identify potential sources for generating cash.

Start-ups should begin creating their cash flow statements immediately so that they can monitor and manage their cash carefully.

It’s important to create cash flow projections for start up business regularly to ensure that you have cash now and in the future. Doing so will allow you to make decisions now to either increase funding from investors or sales to improve cash inflows and ensure you’re covering expenses.

Let’s look at a few cash flow for start up examples to see how this whole process works.

Simple One-Month Cash Flow Forecast

• Starting cash balance: $4,000
• Cash inflows
  • Sales: $17,000
  • Total cash inflows: $17,000
• Cash outflows
  • Materials: $7,000
  • Marketing: $1,500
  • Wages: $5,000
  • Total cash outflows: $13,500
  • Net cash flow: $3,500
  • Closing cash balance: $7,500

This is just a simple example to illustrate how forecasting works. Most start-ups will have more sources of cash inflows and more expenditures. Forecasts should incorporate each of these inflow sources and expenses to ensure accuracy.

Many start-ups fail because they run out of cash. But careful monitoring, management and analysis of your cash flow can help prevent this from happening.

The Cash Flow Frog app can make it easy to engage in cash flow analysis for start up business. Cash Flow Frog gives you the tools to:

• Create cash flow forecasts and projections
• Create what-if scenarios to see how your decisions will impact your cash flow
• See which customers pay on time and which ones may need new payment terms
• Create branded reports
• Track your planned cash flow vs. your actual results

Cash Flow Frog integrates with the accounting tools you’re already using, so it’s quick and easy to get started creating accurate cash flow forecasts and projections.