Cash Flow
From Entrepedia: The Entrepreneurship Wiki
Cash Flow statements are the most important for startups: all other financial statements are relatively unimportant at that point. The document projects cash uses and needs on a rolling basis.
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Calculating Cash Flow
Matt McCall, Managing Director of Draper Fisher Jurvetson Portage Venture Partners and author of the blog VC Confidential, roughly describes the formula to determine operating cash flow as including:
- Net Income
- + Depreciation, amortization, non-cash income statement items
- - Working capital needs
- - Core, recurring capital expenditures [1]
Terminology
In addition to McCall's formula and other, similar formulas, there are certain terms that you will need to be familiar with:
- Break-Even Point
The break-even point is one term that most people should be familiar with - it is the point at which your venture starts making a profit. In producing a cash flow projection, you will need to identify how many sales you will require to reach this point, when you are able to cover all of your expenses – and there is more to this than you're probably aware of off the top of your head – and any further sales will be a profit.
Depending on your expenses, your venture may appear quite successful, with high sales bringing in a fair amount of cash, while in reality you are still running at a loss because you have not yet reached that break even point.
- Cash Burn Rate
This term refers to what is defined by Investopedia as "the rate at which a new company uses up its venture capital to finance overhead before generating positive cash flow from operations." [2]
- Zero Cash Date
Cash Flow Management
- Information provided by Bob Kelly
An integral part of any business plan is its cash flow. This is the lifeblood of any business and should not be confused with profitability. Most analysts will tell you that poor cash management is the main reason for business failure. Cash is ready money in the bank or the business and is the source used to pay suppliers, rent, employees, or loan and investor payments.
Cash is a fundamental requirement to maintain the running of the business.
Cash quite simply is the movement of cash into and out of the business. Monitoring the inflow and outflow of cash should be one of the most important objectives of any business owner.
The principles of good cash management should be simple:
- Be aware when, where, and how your cash needs occur
- Be aware of the best sources for meeting additional cash needs (owner, equity or debt).
- Be proactive and think ahead when identifying these needs and do not leave them until it is too late. This requires maintaining good relationships with bankers, investors and other creditors.
A cash generative company will more than likely be a profitable one as the cash flow disciplines necessary will promote profitability.
When your business plan and cash flow is complete then this should be used as the key document when looking for funding. It has to help investors and lenders understand your vision and goals, and understand how this will benefit them as well as the business.
Further Reading
- For a sample cash flow document, see the Louth County Enterprise Board's Cash Flow Form
- Tom Byers (Stanford Technology Ventures Program): "Importance of Cash Flow for Small Companies" in Stanford Entrepreneurial Thought Leader Speaker Series (video)
