Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business. It is the pulse of your company. It measures the liquidity available to you at any given moment to pay bills, salaries, and operating expenses.
In a startup environment, cash flow is often more critical than revenue or profit figures. It represents the reality of your bank account rather than an accounting abstraction. If more money is coming in than going out, you have positive cash flow. If you are spending more than you are collecting, you have negative cash flow.
For early-stage companies, negative cash flow is normal. This is known as your burn rate. However, understanding the mechanics of how money moves through your organization is the only way to ensure you do not run out of fuel before reaching your destination.
The Difference Between Cash Flow and Profit
#The most dangerous trap for a new founder is confusing cash flow with profitability. These are two completely different concepts.
Profit is an accounting term. It is calculated as revenue minus expenses. However, this calculation often includes money you have earned but not yet received.
For example, you might sign a contract worth one hundred thousand dollars today. On your Profit and Loss statement, you look profitable. You technically made a sale. However, if the client does not pay that invoice for sixty days, your cash flow is zero.
You cannot pay your employees with a signed contract. You can only pay them with cash. Many profitable businesses go bankrupt simply because they run out of cash while waiting for customers to pay their bills.
The Timing of Money
#Cash flow is fundamentally about timing. It is not just about how much money moves, but when it moves.
In a startup, there is often a significant lag between when you spend money to create a product and when you receive money from selling it. You have to pay developers, buy servers, and run ads weeks or months before a customer swipes their credit card.
This gap is called the cash conversion cycle. Your goal is to shorten this cycle as much as possible. If you have to pay your suppliers in thirty days, but your customers take ninety days to pay you, you are acting as a bank for your customers. This creates a cash crunch that can stall operations even if sales are booming.
Managing Liquidity Scenarios
#Founders must constantly forecast their cash flow to anticipate bottlenecks. This involves looking at your burn rate and your accounts receivable.
If you see a cash crunch approaching in three months, you have options. You can chase late invoices from clients. You can negotiate longer payment terms with your own vendors to keep cash in the bank longer. You can delay a planned hire.
The goal is to ensure you always have enough liquidity to cover immediate obligations. Investors look at your cash flow statement to judge the health of your operations. It tells them if you are disciplined with capital and if you understand the operational levers of your business.
Ultimately, revenue is vanity, profit is sanity, but cash is reality.