What’s Involved with a Cash Flow Analysis: Startup Edition

As a startup, capital is everything. You need cash to hire and retain top talent, make market-defining sales, generate R&D strategies, and create brand-defining marketing campaigns. Unfortunately, it’s not always easy to understand how much liquid capital you have available, especially in the fast-paced startup ecosystem.

Don’t worry; we’ve got your back.

Every startup should perform regular cash flow analysis. This simple, intuitive, and time-proven accounting methodology gives you the data you need to make smart market plays. But, it’s not foolproof. And it can be a serious pain to perform without an established accounting team. Here’s everything you need to know about cash flow analysis.

What is a Cash Flow Analysis?

A cash flow analysis tells you how much money flows in and out of your business over a specific time period. If your cash flow is positive, your business made a cash profit during this time period. If it’s negative, you spent more than you earned (in theory). Large enterprises rely on robust accounting teams to handle their cash flow analysis. For small businesses and high-growth startups, determining cash flow is a little trickier.

Generally, a cash flow analysis uses a type of statement called a cash flow statement. These detailed reports break down your incoming assets (e.g., cash, accounts receivable, incoming investments, etc.) and outgoing funds (e.g., accounts payable, outward investments, financing activities, etc.) across each core bucket of your finances (namely: operating, financing, and investing). Creating these cash flow statements requires a transparent, top-down view of business assets and an end-to-end understanding of your financial ecosystem.

Why is a Cash Flow Analysis Important?

Your cash flow analysis is the lifeblood of your business. Without it, you’re essentially operating in the dark. In fact, a cash flow analysis can help you answer very important questions, like:

• Should you be investing more money in the business?
• Can you afford to make an aggressive market play?
• Will you need additional funding in the future?
• Are your receivables healthy?
• Are you really growing?
• Are you maxing out loans without giving your business room for emergency situations?
• Do you truly understand your local market?
• How much of your accounts receivable is credit vs. liquid cash? And how does that impact your financial flexibility (lenders typically only allow for a 70-80% loan against your open accounts)?
• Are certain periods creating net negatives? And do you need a bridge for those periods?
• Can you make that awesome R&D investment?
• How much is your business worth in an exit?
• And more

In other words, cash flow analysis helps answer most financial questions surrounding your business. And answering those questions can fuel your growth significantly.

What’s Included in a Cash Flow Analysis

Let’s break down the basics of a cash flow statement. There are three basic sections:

1. Operating cash flow
2. Investing cash flow
3. Financing cash flow

In each section, you want to add together all sources of gain and subtract all sources of loss.

These sources look different for each bucket. So, gains in operating cash flow include basics like changes in inventory, receivables, and net income. Losses would include accounts payable, and other liabilities. Gains in investing and finance may include liquidations of investments and debt issuances. Losses in these buckets may include outward investments and dividend payments.

While cash flow analysis may seem simple on the surface, it can get complicated, fast. Not only do you have to sniff out every source of gain and loss throughout your company, but you also need to understand them and how they can inform business decisions over time.

And, as you can see, all things are not equal between buckets. A negative cash flow in investing and financing is often desirable — since these two buckets often fuel future growth. A negative cash flow in operations, on the other hand, is a red flag. But it’s not the only one.

Cash Flow Analysis Red Flags

While cash flow analysis is capable of exposing a wide variety of issues, these are the most common “red flags” startups should look out for:

• Excessive surplus: Believe it or not, having too much surplus isn’t always a “good” thing. Startups typically need to invest heavily in aggressive growth strategies. Too much cash could mean you’re failing to invest wisely. You need to spend money to make money. Unfortunately, some startups find positive cash flow and sit steady, often causing them to stagnate and potentially stunt growth.
• Lots of late fees: Pay your vendors on time, every time. According to a study, around 60% of invoices are paid late. Not only do late invoices create late fees (causing you to pay more than is originally due) but some late payments miss out on “early-bird” discounts. Who wants to pay 4% extra for vendor services? Hint: no one.
• Negative cash flow from ops: You should always aim for a positive cash flow from operations. For many high-growth startups, finding positive cash flow in investments and financing isn’t always easy. It may be a few years before you see the positives roll in from those ventures. But ops is your cash cow. If you can’t predictably rely on it, you have a problem. And it’s a problem you need to fix.
• Downward trends: If you’re a startup, a few periods of net-negative cash flow are easy to justify — especially to investors interested in long-term growth. But you have a problem if your cash flow is trending down consistently period-over-period. 

As always, it’s important to have a full picture of your accounting ecosystem. Knowing no two businesses are alike, it’s important to have a team in place that can understand and manage cash flow on a regular basis, pointing out those red flags and knowing how to address them.

Tips for New Businesses

Here are a few helpful tips for your cash flow analysis woes.

• If your ops cash flow is negative, increase your income: We know! Easier said than done. Still, a net negative ops cash flow is usually a problem, and it needs to be solved quickly. We recommend trying strategies such as reaching out to late-paying clients or customers, adjusting staffing, minimizing inventory investments, or increasing prices. Choosing the right strategy depends heavily on your business needs and requirements. And you should touch base with your outsourced accounting partner or team to formulate a plan, forecast out the impact, and track against it.
• Re-examine your payment schedules: Try to pay vendors early to take advantage of early discounts (and avoid late fees). However, in some circumstances, pushing off vendor payments may be desirable. Again, this depends on your financial position, and this decision should be made with some input from your accounting team — especially since they will have a more accurate long-term view of your financial situation.
• Spend money to make money: Don’t hoard cash. Growth-hungry startups should reinvest cash quickly in the right places to fuel growth. 
• Use best accounting practices: Make sure your overall accounting strategy and practices are solid and data is accurate. Otherwise, your cash flow analysis has very little tangible value.

Ready to Prepare a Cash Flow Analysis? Let’s Go!

Step 1: Identify All Sources of Incoming Funds

First things first, you need to sniff out all of your income sources. Generally, this involves looking for all cash collections from operations, investing, and financing. If you don’t follow best-of-breed accounting practices and keep a tight book, this can be challenging. Look for sources of income like:

• Accounts receivable
• Sales of investments (long-term)
• Equipment sales
• Land sales
• Furniture sales
• Loans
• etc.

Most businesses make the vast majority of their cash-in from operations. So, it’s important to carefully calculate ops income to get an accurate view of your cash flow. You can always have someone else handle your accounting if you’re struggling with keeping the books.

Step 2: Identify All Business Outgoing Funds

Once you’ve identified income, you need to find your expenses and outgoing funds. Many growth-minded businesses may have significant capital tied up in both investments and financing activities in addition to those expended to fuel operations. Business expenses may include:

• Accounts payable
• Debts
• M&A
• Purchases of property, equipment, facilities, furniture, etc.
• Stock repurchases
• Dividend payments
• etc.

Trying to discover expenses for both financing and investment can be challenging, and it’s always best to get expert advice during this process.

Step 3: Create Your Cash Flow Statement

Once you’ve identified both your income and expenses, create a cash flow statement. This part is easy. Simply subtract the expenses from the income. Remember, keep each section separate. You don’t want financing activities in the ops column. It can mystify your current financial position.

Step 4: Analyze Your Cash Flow Statement

This last step is actually the most challenging. What do you do with this newfound information? How can you leverage any of the information you get from a cash flow statement?

We can’t give concrete advice on this section. Every business has different needs and requirements, and everyone uses a different operating strategy. Some businesses run perfectly well with a negative cash flow during their growth phase. For others, it could spell disaster. You should reach out to expert accountants and strategists to help you use this information to make actionable changes.

Speaking of…

Are You Ready to Get More Out of Your Cash Flow Analysis?

Every startup needs a cash flow analysis. Unfortunately, creating cash flow statements to fuel growth and ideation isn’t always easy. In large businesses, cash flow statements are often generated by their accounting department using best-in-class in-house systems and processes. For smaller businesses and high-growth startups, things get a little more… complicated. Often, trying to wrangle your finances is challenging, especially without a dedicated accounting team. Unfortunately, this often leaves small businesses without existing cash flow statements — making it especially hard to create a cash flow analysis.

We can help. Heck, we’ll do your entire cash flow analysis for you. At hiline, we pair world-class accounting practices with growth-minded strategies. Are you ready to unlock your startup’s financial capabilities? Contact us.