3 Musts For Better Cash Flow Management
Cash is mission critical for any business and running out of it is the number 1 startup killer.
Generating tons of revenue and showing a lot of accounts receivables (A/R) mean little if you don’t also have adequate cash in the bank to keep the lights on. Keeping a laser focus on your cash position and always maintaining a healthy operating runway are two of your main tasks as a founder. Ryan Johnson, EGFS’ VP of Operations recently laid out his insights and recommendations on our Simple Steps to Better Cash Flow Management webinar:
Optimizing your cash flow management:
#1. Apply a scientific approach to monitoring and understanding your cash flow. Measure your results, then incorporate the feedback you get into your next decision.
#2. Your assumptions about your business are the keys to quantifying and modeling your cash flow. The way to do that successfully is to qualify your assumptions based on real world data collected in real-time. Once you have them, work them into your financial model so that it is as accurate as it can be.
- Let’s look at key assumptions for a minute. The most important ones are around:
- Revenue: how quickly you expect to generate sales and what that looks like, i.e.,
your revenue model (upfront in a SaaS model, monthly via automatic credit card payments,
extending A/R to customers?)
- The timing of your cash outflows for headcount (how many key hires do you need to
support revenue growth over the next 12-18 months?)
- CAC (sales and marketing, lead generation).
#3. When you create financial projections, it’s not useful or realistic to go too far beyond 18 months. But you need to model out at least that far so that you can plan for lining up funding.
How do you start making cash flow projections? Use history if you have it. Where you don’t, rely on accurate real information wherever possible along with educated assumptions and industry comparables. Regularly compare your projections to your actual results and use the real world data to update your model. If you aren’t financial model savvy, work with someone who is.
Creating Financial Statements
In an ideal world, you would create a full set of financial statements including income statements, balance sheets, and cash flow statements. It’s the most accurate approach, but it is more expensive and not always possible to do.
That’s where the hybrid model comes in. It is easier to think through than the full approach; but it’s also easy to miss items that use cash (e.g., working capital). Still, it makes sense in cases where cash flow is equal to income. For example, this would work well in a SaaS business that charges customers automatically on a monthly basis. With a hybrid model, you start with the P&L, then add capex to account for fixed asset purchases and other expenses.
Tracking Cash Burn
Cash burn is one of the most critical metrics for you to track. Stay on top of your run rate and remaining runway so you always know when you’re going to run out of cash and you can be proactive about planning for funding. Be prepared to be able to detail your burn rate—what drives it and what you plan to do about it to investors. Make your assumptions dynamic and measure results in real-time.
The bottom line? Keeping an eagle eye trained on your cash will help you better understand your cash flow: where your money is going, what you can to do about it, and how to keep cash in your pocket for longer.
Deborah Adeyanju is Content Strategist & Social Media Manager at Early Growth Financial Services (EGFS), an outsourced financial services firm that provides small to mid-sized companies with day-to-day accounting, strategic finance, CFO, tax, and valuation services and support. Prior to joining EGFS, Deborah spent more than a decade as an investment analyst and portfolio manager with leading financial institutions in New York, London, and Paris. Deborah is also a Chartered Financial Analyst (CFA) charterholder.