Are you wondering how positive and negative cash flow impacts your startup?
Cash flow isn’t always everything, but it can dramatically impact companies. Especially newer startups. It can make or break you, and often faster than you expect. Here are some of the ways it can influence your venture for better or worse. Including some that you may not have thought of yet. Plus, what you can do about it.
Cash Flow 101
Cash flow is the money flowing through your business from revenues. It’s the income you are earning. Loans and equity funding are not real cash flow in this sense. So, it’s how much you are earning from sales.
Positive cash flow is when your income is more than your outgo. You have additional cash left over after paying all the bills.
In contrast, negative cash flow means that not only don’t you have anything left, but you aren’t even making enough to cover all of the bills. The business isn’t really net profitable. You are having to pull in cash from other sources to cover this accounting gap. That may be from personal finances, other business ventures, or taking on debt or raising capital by selling equity in your company. While there may appear to be exceptions, and there may be periods you can get away with it, negative cash flow typically isn’t sustainable forever.
Common reasons for negative cash flow include poor financial planning and cash flow forecasting, overspending, taking on too much debt and overhead, and business interruptions which can be caused by competition, market shifts, competition, and natural disasters.
The Impacts Of Negative Cash Flow
If you don’t have enough money to cover the bills you are technically insolvent. You can beg and borrow, but unless you turn this negative into positive, sooner or later it will lead to bankruptcy. In fact, with a cash flow shortage you can go broke in your best month for new orders. You may not have enough money to survive the gap. This is a critical factor when addressing how positive and negative cash flow impacts your startup.
A business that is losing money is clearly less likely to attract the best funding. Whether it is a lender or equity investor, negative cash flow means more risk and more work to create positive returns. Even if you can access new capital it will take a lot more time and work, and the terms won’t be as attractive.
In this regard, keep in mind that in fundraising storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
One of the first impacts of negative cash flow is the inability to make payroll on time. People work for you in exchange for a predictable paycheck. If you can’t provide that, why are they going to put in the hours and show up? If they are good the competition will be waiting there to poach them. At a minimum, failure to pay them on time can bring down morale, motivation and belief in the company, mission and your leadership.
Losing Vendors & Business Partners
While you may be able to stretch out the terms on bills for a month or two, this will grind on your suppliers too. You’ll move from being their favorite client, to a pain. They’ll prioritize other customers, who are probably competing with you. Eventually they may cut you off. You’ll be forced to look for inferior suppliers for manufacturing, delivery and other essentials. That can compound the issues your business is already facing.
Damage To Business Credit Ratings
Falling behind on bills and loan payments can deteriorate your business credit rating. That can negatively impact your ability to get credit in the future. Or at least the terms you can obtain credit at. When thinking about how positive and negative cash flow impacts your startup keep in mind that credit equals trust and without the latter there is nothing.
The leaps often come from being able to seize on timely opportunities. Those deals that open up and can catapult you to the next level, if you have the cash to take advantage of them. Just like the rich keep getting richer from well timed investments, the same applies to businesses too. If you miss them, someone else will take them and use them for their competitive advantage.
Marketing is what drives your business. It is what brings in customers, sales and more income. In a negative cash flow situation startups are often tempted to pull back on marketing spend. That usually just accelerates their worst fears happening.
you may find interesting the video below where I cover in detail how to create a marketing plan.
When your business is bleeding money it can be stressful. There is enough stress floating around on the good days in a startup. Not only can this impact your health, but your decision making. Rash, panicked decisions can be made that cause other chain reactions.
The Benefits Of Positive Cash Flow
You may still have a net loss on paper with taxes, but positive cash flow suggests you are profitable.
Securing Great Talent
Free cash flow means being able to hire the best team, and when necessary lure them with sign on bonuses and help with relocation expenses.
Ability To Grow & Expand Organically
Positive cash flow means you can use real profits to grow your business organically without taking on more debt or selling shares of ownership.
It may not seem trendy to be profitable in some Venture Capital circles in some phases of the economy, but there will always be a demand to invest in cash flow positive businesses. It is magnetic. It gives you the power in negotiating the terms. All while encouraging inbound offers instead of having to heavily invest in a fundraising campaign.
Peace Of Mind
You may thrive on the excitement of moving fast and daily chaos of startup life. Though you may feel a lot better with the bills and team paid, and maybe even being able to pay yourself.
Hopefully this post provided you with some insights as you are looking into how positive and negative cash flow impacts your startup.
You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.