Cash Flow Management: The Lifeline of Your Business

Having the best product in your market or a solid plan for scaling your business is meaningless if you lack the cash to keep operations running. For startups, cash flow isn't just another financial metric; it's the heartbeat of the business.

Understanding how money flows in and out of your business allows you to maintain control. It isn't just about having more revenue than expenses; timing is crucial. Bills don't wait for invoices to be paid, and the gap between incoming and outgoing funds can be the difference between a thriving business and one that struggles to survive.

Even if you've mastered your gross margins and unit economics, cash flow is where those figures come to life. It is the foundation for making wiser decisions, avoiding potential problems, and achieving financial sustainability.

Understanding Cash Flow Basics for Startups

Managing cash flow goes beyond simply checking your bank balance. It's essential to understand where your money is located, how quickly you can access it, and what financial obligations are on the horizon. To gain a comprehensive view, begin by evaluating your liquidity. Then, assess your accounts receivable, accounts payable, and ongoing cash needs.

Liquidity: Knowing What's Available and What's Accessible

The first step in managing cash flow is understanding liquidity—specifically, how much cash your business has available at any moment. This includes not only the money in your bank account but also other sources of capital that you can access when necessary.

Some businesses have a credit line to address short-term cash flow gaps, while others may rely on savings or available investor capital in the form of loans or equity. While these options can be helpful, they are not always immediately accessible. For example, a credit line might require approval for withdrawals, and obtaining funds from investors can take time and may not be available on short notice. Therefore, knowing how quickly you can access these resources is critically important.

It's essential to distinguish between immediate liquidity (cash on hand and readily available funds) and contingent liquidity (funds that take time to access, such as through loan approvals or extended payment terms). Ideally, you should have a mix of both types of liquidity. However, relying too heavily on contingent liquidity can put you in a difficult position when unexpected expenses arise.

Accounts Receivable: Tracking What's Owed to You

Liquidity indicates what you currently have access to, while accounts receivable (AR) reflects what you expect to collect in the future. When you issue invoices for completed work or delivered products, you're anticipating incoming cash. However, until that money is received, it can't be spent.

Many businesses encounter challenges with the total amount owed and the time it takes to collect those payments. Not all revenue is equally valuable, especially when some payments are overdue. To effectively manage AR, it's essential to know how much is owed to your business, which invoices are still within the agreed payment terms, and which are overdue, particularly those over 30 days past due.

Following up on invoices exceeding 30 days is generally considered good practice. Delayed payments can create cash flow gaps, forcing you to cover expenses while waiting for the money to arrive. We will explore best practices for managing AR and improving collection times in future posts. The key takeaway, however, is to monitor AR closely and follow up consistently.

Accounts Payable: Managing What You Owe

It's important to keep track of both what is owed to you and what you owe. Accounts Payable (AP) encompasses the bills, vendor payments, and outstanding obligations your business needs to settle.

Late payments can damage supplier relationships, negatively impact credit standing, or disrupt service. Like with Accounts Receivable (AR), monitoring aging payables is crucial. Have any invoices slipped past the 30-day mark? Are there upcoming bills that strain your cash reserves?

Understanding your AP is not just about avoiding late fees; it's also about planning your cash outflows to align with your inflows. If your customers take 45 days to pay you, but your vendors expect payment in 15 days, you could face a cash crunch even if your business is profitable. Identifying these timing gaps early on allows you to negotiate better terms or make adjustments before issues arise.

Monthly Cash Needs: Knowing What It Takes to Keep Running

Every business owner should clearly understand their monthly cash needs, which are the essential expenses required to keep operations running smoothly. These expenses include rent, payroll, software subscriptions, and marketing costs.

Some expenses are fixed, meaning they remain the same each month, such as rent or full-time salaries. Others are variable and fluctuate based on business activity, like raw materials, shipping costs, or commission-based wages.

You can effectively plan for future spending and avoid surprises by mapping out your monthly cash needs. For instance, if your revenue decreases in one month, do you have enough liquidity to cover your essential expenses? And if an unforeseen expense arises, can you manage it without compromising your financial stability? Keeping a simple breakdown of your core monthly expenses will ensure you consistently understand what is needed to maintain operations.

How to Make Cash Flow Management a Habit

Even the simplest system won't be effective if you don't use it consistently. Cash flow management should be a regular part of your routine, like checking sales figures or tracking inventory.

Set aside time at least once a month to update and review your cash flow. Examine what's coming in, what's going out, and whether you're on track. If your runway is shrinking, making adjustments is essential rather than waiting until you're down to your last month of cash.

When to Take Action

Monitoring cash flow is not just about understanding your current financial situation; it's also about recognizing when you need to make adjustments before issues arise. If you start to notice cash flow problems, consider these approaches to address them:

• Shorten Payment Cycles: Offer discounts for early payments or adjust your payment terms.

• Extend Payables When Possible: Negotiate with vendors for flexible payment terms.

• Trim Unnecessary Costs: Identify expenses that can be reduced or postponed.

• Secure Additional Funding: Consider credit lines, grants, or fundraising options before running low on cash.

Your Cash Flow Challenge

Now that you understand how cash flows through your business, here's your challenge: set up a simple cash flow tracker today.

1. Write down your current cash balance.

2. List all expected revenue for the next 30 days.

3. List all expected expenses for the next 30 days.

4. Subtract your expenses from your revenue to determine your net cash flow.

5. Review your expenses and familiarize yourself with where every penny goes.

6. Repeat this process for the next month and the following months.

Over time, you'll start to recognize trends. The goal is to increase your awareness so you always know your financial standing. The more you track, the more control you'll have over your business's financial future.

Next Steps:

➡ Explore our Services to refine your business strategy.
➡ Visit our Resources for expert insights and startup tools.
➡ Check out our latest Blog Posts for more guidance on startup financials.