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.
See How I Can Help You With Your Fundraising Efforts
- Fundraising Process : get guidance from A to Z.
- Materials : our team creates epic pitch decks and financial models
- Investor Access : connect with the right investors for your business and close them