Owning a startup is a race against insolvency. Founders are constantly trying to gain traction before they run out of money. As a founder it's important to understand your cash flow so you can better run your business. Having a good grasp of your cash flow could indicate the amount of runway you have left, how much money you need to ask for in a raise, or how you need to tweak your business model. Let's take a look at the common elements of a cash flow chart and how you can easily make one as a founder.
What Makes Up a Cash Flow Analysis
A typical cash flow analysis has three basic elements: 1. Revenue 2. Expenses 3. Cash
All of these are fairly self explanatory but it is important to track them all properly. Your revenue and expenses need to be tracked on CASH FLOW basis. For example if you run a three month unpaid pilot with your customers before they sign a contract, then you need to only count that revenue in the fourth month. If you get paid upfront, then include everything in the month the contract was signed. Otherwise, you need to track when your payments are actually being made. All too often I see people track their receivables, these are important, but not as important as your actual cash received.
For expenses what really matters is how much cash is leaving the door every month. I like to include expenses into there categories: Product (cost of goods sold), Staff, and other. This allows you to easily break down where you main cost drivers are coming from.
The last variable is also the simplest one. How much cash do you have on hand? The starting point is important but it is the interaction of these three variables that will give you the most valuable insights.
Insights From Your Cash Flow Analysis
Once you have projections for the three variables above it's time to make your cash flow analysis chart. Your chart should look something like the below with Revenue being the blue line, Expenses being the red line, and Cash being the green line:
The first insight you can gain is from the slope of your revenue (blue) line compared to your expense (red) line. If your revenue line should have a greater slope than your expense line. If it doesn't, you need to rethink your pricing, margins, and operating model to ensure you can make money. The next insight you can gain is from the low point of your cash (green) line. If everything works as projected in your financial model (which can be a big "if") then your low point is the amount of money you should be asking for from investors to make your business model work. I usually advise founders to add at least 4-6 months of salary expenses to this number since things often don't work as smoothly in real life as they do in our financial models. The last major insight we can gain is the point at which cash line crosses your expenses line. This is known as the point at which your firm becomes "cash flow positive". This is the point at which your company makes enough money off of its revenue that you don't need to raise additional money from investors. The closer your cash flow positive point is to the start of your model the better. Cash flow positive in 12 months is great, on the other hand if it is three years you might want to revisit your financial model.
Summary
Cash still makes or brakes startups. Founders that have a better grasp of where their cash is coming from and where it is going generally have a better idea about how to run their business. A cash flow analysis of revenue, expenses, and cash can give you valuable insights into how run your business. These insights include your profitability, how much money you need to raise, and when you can expect your business to be cash flow positive. If you need any help with your cash flow analysis or financial model in general, reach out to us at InfleXion Point. We are happy to help!