Every great startup begins with an innovative idea. In many cases, it’s the solution to a universally-recognized problem. It could be a better way to get places through ride-hailing services or a faster, more efficient option to traditional food delivery methods. It may even be as simple as an app that automatically loads coupons into your browser.
No matter how brilliant the idea, the majority of startups still need to be mindful of their finances. While there are a handful of unicorns with valuations of $1 billion-plus — that’s simply not the case for most startups. This is where having in-depth knowledge of your startup’s cash flow comes into play.
We’ll get to exactly what cash flow entails in just a moment, but the bottom line is this: money talks. If you don’t have a firm grasp over the financial side of your startup, it won’t matter how creative or innovative your business is. With that in mind, we want to make sure your startup is a success. That’s why we’re here to break down what you need to know about cash flow reporting as it pertains to your business.
How Does Cash Flow Work?
It’s easy to look at the term “cash flow” and think it’s about how much money is coming into your startup. While that’s not wrong, it’s only half the equation. Cash flow quite literally refers to money that is “flowing” in and out of your business. It may seem obvious, but cash flow runs both ways — your inflow and outflow.
Cash inflow is money coming from sales based on customers and clients who purchase your products or services. It can also refer to funds coming from investments or financing that your startup has access to. In the simplest terms possible, cash inflow is all the money going into your startup.
Cash outflow is money that is going out of your business to pay for different expenses. This includes everything from rent or mortgage on your office space to taxes your startup needs to pay. It also encompasses expenses such as employee and supplier payments and loans that need to be paid back to investors. Again, in layman’s terms, cash outflow is all the money going out of your startup.
Why Does Cash Flow Reporting Matter?
A startup is considered healthy if the cash inflow is greater than its outflow. Makes sense, right? If the amount of money your startup has coming in is higher than the amount that’s leaving it — you’re already on the right track.
The real issues begin when your cash outflow is more than the inflow. If your startup consistently brings in a cash inflow that is lower than the outflow, it could spell bankruptcy in a hurry. Even if your startup avoids the dreaded b-word, potential investors may examine your cash flow and determine that it’s not worth the financial risk to invest.
So how can you avoid this kind of fate? The answer is cash flow reporting. The result of this type of analysis will give you valuable insight into the cash flow of your startup over a specific period — better known as a cash flow statement.
Equipped with this information, you accurately decipher your cash flows through operating, investing, and financing activities. Remember that every startup presents a unique set of financial challenges. One startup may put too much money into operating activities while another may have a ton of debt piled up thanks to investing activities. The only way to identify cash flow problems and help solve them is through consistent cash flow reporting.
Having trouble staying on top of your cash flow? We offer full cash flow reporting on a weekly or monthly basis, so your startup has all the financial means to succeed. Get in touch with us to find out how Virtual CFO can set up consistent cash flow reporting for your startup.