Cashflow, also known as cash flow, is the amount of money that comes in and out of a company over a specific period of time. It is essentially a measure of a company's liquidity, showing how much cash it is generating or consuming in its daily operations.
In today's article, we'll explore in detail the importance of cashflow in the context of a startup and what practical strategies can be applied to control it and improve its flow.
Positive cash flow occurs when a company is generating more cash than it is spending. This can come from sales, investments, financing, or any other source of income. Positive cash flow is essential for a startup because it means that the company has the necessary resources to pay its debts, invest in business growth and cover operating expenses.
On the other hand, negative cash flow indicates that a company is spending more money than it is generating. This can occur due to high operating expenses, significant initial investments, or a decline in sales. Negative cashflow can be problematic for a startup because it can lead to financial difficulties, lack of capital to finance daily operations, and even bankruptcy if not properly managed.
It is important to note that, although a company may have solid income on paper, if it does not have a positive cash flow, it may find itself in an unstable financial situation. Therefore, the constant monitoring of cash flow and the effective management of cash flows are critical to the financial health and long-term survival of a startup.
How to control the cashflow of your startup?
At Intelectium, we are clear that establishing a clear and detailed budget is the first step. This involves identifying all the expected revenues and expenses during a specific period, in order to have a clear view of the company's financial situation and plan for the efficient use of resources.
On the other hand, creating realistic financial projections, reviewing and updating them regularly, is essential for anticipating future cash flows and making strategic decisions. These projections may include estimates of sales, operating costs, investments, and other factors affecting cash flow.
As we can see, preparing annual budgets is a fundamental part of long-term financial planning. Establishing clear and detailed financial objectives for the coming year helps guide daily operations and allocate resources efficiently.
Another crucial aspect is to wear a accurate record of all the startup's income and expenses, either using accounting software or specific financial management tools. Regular monitoring makes it possible to identify trends, detect potential problems or deviations from the budget, and make informed decisions and corrective measures to adjust cashflow as needed. It's crucial to remember that cashflow is a dynamic aspect and can change rapidly in response to various variables of the business and the economic environment.
On the other hand, it is essential for a startup establish cash reserves to deal with unforeseen situations or financial crises. These reserves provide a financial cushion that can help cover operating expenses during periods of cash stress, avoiding the need to resort to loans with high interest rates.
As a startup grows, it may need additional funding for expansion, innovation, or asset acquisition. Long-term financial planning involves identifying future funding needs and exploring various options, such as outside investors, bank loans, or government funding programs.
As we have mentioned, identifying and managing the different cash flows in a startup is essential to ensure sound and sustainable financial management.
What are the main sources of cash flows?
- Sales: They are one of the main sources of income for any startup. It's crucial to closely monitor the cash flow generated from sales to ensure that it's consistent and predictable. This involves evaluating the effectiveness of sales strategies, identifying trends in customer behavior, and adjusting tactics as needed to maximize revenue.
- Customer charges: It's essential for maintaining positive cash flow. This involves ensuring that clear credit policies are established, sending invoices in a timely manner, actively tracking outstanding payments, and establishing processes to prevent delinquent customers. Improving the speed of collection can help maintain a healthy cash flow and avoid liquidity problems.
- Operating Expenses: They include all the costs associated with the daily operation of the company, such as salaries, rent, utilities, supplies, marketing, and others. It is important to manage these expenses efficiently to avoid waste and optimize the use of resources. This may involve finding ways to reduce costs, negotiate contracts with suppliers and prioritize expenses based on their impact on profitability.
- Investments: They may include expenses aimed at expanding the business, developing products, acquiring assets, or any other investment intended to generate a return in the future. It's important to carefully evaluate the expected return on each investment and ensure that it's aligned with the startup's long-term financial objectives. Managing investments effectively helps maximize return on capital and drive business growth.
- Loans: They can provide an additional source of funding for a startup, but they also generate cash flows related to interest payments and the repayment of principal. It's important to understand the terms and conditions of any loan and ensure that scheduled payments are manageable within the company's cash flow. Managing loans effectively helps to avoid liquidity problems and to maintain a strong financial position.
Understanding and managing each of these cash flows properly is critical to the financial health and long-term success of a startup.
As we can see, aspects such as inventory management and accounts receivable management are critical and can have a significant impact on a company's cash flow.
How can you optimize these processes and improve the liquidity of your startup?
Inventory Management:
- Storage costs: Maintaining excessive inventory can increase storage costs, which negatively affects cash flow.
- obsolescence: Obsolete products take up space and dampen cash flow. Keep an eye on products that aren't selling and consider strategies to get rid of them, such as discounts or promotions.
- Inventory Rotation: Improving inventory turnover can help free up cash and reduce costs associated with long-term storage.
- Negotiation with suppliers: Negotiating longer payment terms with suppliers can help improve cash flow by providing more time to sell inventory before having to pay for it.
Accounts Receivable Management:
- Clear credit policies: Establishing clear and consistent credit policies can help ensure that customers pay on time. Define specific payment terms and communicate them clearly to your customers to avoid misunderstandings and payment delays.
- Fast billing: Send invoices to your customers as soon as a transaction is completed. The sooner the invoice is sent, the sooner payment can be received.
- Active Tracking: Proactively track accounts receivable to identify and address overdue payments.
- Early payment incentives: It offers discounts or other incentives to customers who pay their bills before the due date to encourage timely payment and improve cash flow.
By implementing effective inventory and accounts receivable management strategies, a startup can optimize its financial operations and improve its liquidity, contributing to a healthier and more sustainable cash flow.
As we have seen in previous points, the long-term financial planning is essential for success and sustainability, providing stability and direction to a startup. In turn, it helps to set clear financial goals and chart a strategic course to achieve them, facilitating informed and consistent decision-making over time.
But... Why is good cash flow management so important?
Efficient cash flow management is critical to the success and survival of a startup, and goes far beyond simply maintaining a positive bank account balance.
A healthy cash flow provides the startup with the necessary resources to finance its growth. Before embarking on a expansion strategy, founders must assess whether the company has enough cash to finance growth without compromising its short-term financial stability. Positive cash flow can provide the confidence needed to invest in expansion, whether through opening new locations, diversifying products or services, or entering new markets. Without adequate cash flow, the startup may struggle to finance these growth initiatives.
Along the same lines, hiring staff is an important investment for any startup, but it can also be costly. Cashflow influences a company's ability to hire and retain key talent. Positive cash flow can allow startups to hire more employees or offer competitive salaries and benefits to attract the best talent available. While negative cash flow may limit the company's ability to hire additional staff or may require austerity measures, such as freezing hiring or staff reductions.
In addition, effective cash flow management allows the startup to meet its financial obligations, including the payment of debts and loans. By paying debts on time, the company can avoid additional interest charges, maintain a good credit reputation, and improve its ability to obtain future funding if necessary. Insufficient cash flow can lead to delays in debt payments, which can result in financial penalties and negatively affect the company's financial health.
On the other hand, efficient cash flow management allows startups to take advantage of strategic opportunities that may arise. This could include acquiring attractive assets at favorable prices or making strategic investments in technology or infrastructure. Positive cash flow provides a company with the financial flexibility needed to capitalize on these opportunities and remain competitive in its market.
In short, efficient cash flow management provides startups with the means to finance their growth, meet their financial obligations and take advantage of strategic opportunities that may arise on the path to business success. Therefore, it is essential that entrepreneurs dedicate time and resources to ensure adequate cash flow management at all stages of their startup's development.
Intelectium offers specialized management services for startups and external CFO services. You can contact us at dealflow@intelectium.com to request more information without any commitment.
In short, the cashflow of a startup is a fundamental element both for the startup itself and for its investors and future investors that they consider when evaluating its valuation and viability. It is essential for startups to manage their cash flow effectively to improve their attractiveness to investors and ensure their long-term success.
