Cash flow is the crux of any business. Without proper cash flow management, you'll not be able to pay bills, give salaries to your staff, or provide service to new customers. Every startup runs out of cash in its early days. Haven't you experienced the cash burnout in the halfway run? Things can get worse as time goes on, and payments pile up like a never-ending horizon.
90 % of small businesses fail due to weak cash flow.
In order to find yourself out of this percentage, startups need a concrete cash flow reserve planned and executed very calculatingly. This means the financial management of a startup needs to have an experienced and robust setup.
Know your Startup Cashflow
Below are the tips to make your startup cash flow beneficial
What are your current income trends?
Your business in its early stage is most likely compromising on the cash flow statement by keeping track of your money with accrual accounting rather than cash basis accounting. Accrual accounting is the process when you record income expenses after delivering a service rather than when the money is being actually transferred to your account. Cash basis accounting makes sense of your cash flow only when the exchange of money happens and is then recorded in the books.
Accrual accounting is good for your business as it offers insights into your profit and loss statements and provides an overview of the income of the business as a whole.
It defines the health of the startup. It tells you the movement of your money. Where it is coming from, how it going to be spent, and what you will be left with in order to increase the revenue of your business. It will show you the cash flow analysis of the sales, how often you witness an increase/decrease for what amounts, giving an upper hand than merely looking into cash deposits.
Now, what the accrual process doesn’t tell you is the cash flow formula for a particular period of time. For instance, if you made $10000 last week, it will show you that the money has been made by you at the said time. But not the time when you are actually going to receive it because you didn’t. It will not show you the real value of your cash flow at the current time because the money has not been transferred into your account. Assuming that you made a sale of $10000 without the amount reflecting into your account can lead to major disastrous decisions for the finances of your company.
Cash Basis Statements:
Small businesses and startups should focus on this method of maintaining their cash reserves and cash flow management. It is a recommended process for such businesses who have just started or in the process of their growth. The cash flow statement will show you the real-time being spent, earned, and the amount left in your bank. It will show you the money you had in the beginning until a certain period of time such yearly, quarterly or monthly balances. The amount that you are left at the end of this period is what you actually have as a balance in the bank.
3 activities for a positive startup cash flow statements:
- Cash flow from investing activities determines the number of investments that you are making in the company related to growth. These are your noncurrent assets such as long term investments, property, plant, equipment, and the principal amount of loans made to other entities.
- Cash flow from financing activities is the amount of money that is invested in your company by others such as investors and bank loans that gets recorded. It includes the noncurrent liabilities and owner’s equity such as the principal amount of long term debt, stock sales and repurchases, and dividend payments.
- Cash flow from operating activities is the total amount of money that your startup/company has made during the course of its business operations. The amount of revenue generated and deriving the operational costs to keep the show running. It determines the net income of a business.
For a lot of startups, operating expenses are not a positive cash flow. You may end up spending more on the business assets and not have the same return on your investments. This leads to a burn rate and demotivates the success and profitability of your venture.
Understand your inflow and outflow of cash caters to good cash flow management. No matter how small your company is today, there are more moving financial parts than you can manage dynamically.
By maintaining a balance sheet and the above financial statements intact, your business will get a track of the current cash flow and the projected changes in the future.
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