What is cash flow and why it is important?

Is the hype overblown? If you want it, what are some of the best practices for securing it and making sure your startup business doesn’t run out of it?

What Is Cash Flow?

It is essentially the money moving in and out of your business. Particularly the money moving into your business accounts. It’s your gross income. Cash flow comes from sales, rents, subscriptions, franchises and licensing as opposed to raising equity capital or taking on debt and loans.

It’s Not Just About Cash Flow

As we’ll cover in a moment, we are literally talking about the lifeblood of your business. However, many entrepreneurs and investors also get caught up in buying into the hype that it is only about cash flow when it comes to building a profitable business. It’s not.

If you are only relying on cash flow to stay afloat, you are in a dangerous position. Especially if you are continually highly leveraging your positions and don’t have some tangible value to fall back on.

Or real profits. It doesn’t matter if you have $2B in incoming cash flow each year if your business expenses are $3B. That’s not sustainable for a long period of time. Technically you are still bankrupt.

Just like regular workers, if your cash flow stumbles or is cut off, it may just be a matter of a few weeks before you have to close down or file in bankruptcy court.

You need cash flow, but it isn’t everything. 

Why Is Cash Flow So Important?

While there may be a grander vision and mission to impact the world and solve problems for customers, all businesses are also driven by income.

You are doing this for the income to some extent. Or you’d just retire to the golf course in Florida or start a nonprofit instead, right?

No one can live without cash flow. Not even the largest companies can live without it. Today, a $1M retirement nest egg can easily be blown through in 4 years. Probably much faster. Yet, as long as you have the income you can still afford to live.

Even Elon Musk admits he is technically broke, even though he may have a $26B net worth, and lots of equity in Tesla and SpaceX. If the cash flow from those businesses isn’t positive, he is only a week away from them closing down and being destitute. 

Pay For Things For Your Business

Cash flow can help you pay for all the things you need to make your venture a successful business. Even if you are bootstrapping your startup you need things like monthly website hosting, email services,

Wifi connection, and to renew your corporation every year. Unless you can personally afford to keep putting in an infinite amount of money forever, you have to have cash flow. Lack of it is the number one reason that businesses fail and fold.

Incoming cash flow can also be used to add new products and features, expand your marketing and grow your business. Start with what you have and an MVP. Let the profits and cash flow pay for each of the next steps.

Pay Your Team

It takes a team to run a business. If you want to win your space you have to have the best team. They need cash flow and income too. They have kids to feed and rent to pay.

When you stop paying them, they will stop working. They’ll also leave and talk very negatively about you as a leader and your business. You can’t afford that. Cash flow is what makes sure you can keep on track with payroll.

Keep The Business Alive

Success is often just a matter of staying alive long enough to win. It’s staying alive one more round than your competition. One more month so that your marketing investments pay off. One more week so that you can collect on all the invoices from the merchandise you just shipped.

Most entrepreneurs don’t get that they are most likely to go broke in their best month. Their best month of sales can also be the driest for cash flow, and the one they have the highest percentage of expenses versus income. Cash flow helps bridge these gaps. Especially, stockpiling some of the previous months’ of cash flow as capital reserves.

Surviving When Fundraising Is Hard

Markets are constantly influx. In recent years we’ve seen startups march through back to back funding rounds, set new records in startup fundraising, and seemingly siphon off limitless hundreds of millions of dollars in capital. Even if they don’t have any cash flow themselves. That isn’t going to last forever. It won’t always be this easy.

It certainly wasn’t this easy landing a term sheet from investors in 2008 or 2000. Cash flow will get you through when you have to wait to raise your next round.

Remember that storytelling plays a key role in fundraising. This is being able to capture the essence of the business in 15 to 20 slides. For a winning deck, 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.

Keep Growing When The IPO And M&A Market Is Tough

Any great M&A consultant will tell you than the same applies to exits. You might think you are on track for a record-setting IPO next year, and then have to completely change course if the markets change.

There can be periods when few giant corporations are making acquisitions. Especially cash acquisitions. A positive position on cash will get you through until you can pull off an epic exit. 

Before you start, create a cash flow analysis to understand your needs and how to budget. Look for ways to create cash flow from day one with presales and contracts. Then build on that.

 

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