Mastering Cash Flow: Essential Strategies for Startups

Cash flow is a startup’s lifeblood. It covers operational expenses, pays salaries, funds debt repayment, and covers many other expenses, both expected and unexpected.

However, many startup founders often underestimate the importance of their venture’s cash flow. Because of this they fail to take the steps needed to ensure a healthy cash flow. When startups fail — which some statistics say happens 90 percent of the time — a lack of cash flow is often a key contributor.

“Poor cash flow can affect a startup’s success in a variety of ways,” shares Snehal Shinde, Co-Founder and Chief Product Officer at Zeni. “It can result in delayed payments, inability to invest in growth opportunities, and difficulty in meeting financial obligations. Because startups don’t usually have the capital or resources to withstand dips in income, establishing a healthy cash flow must be a priority.”

Shinde, who has over 15 years of professional experience as a product entrepreneur, designed Zeni’s AI Bookkeeping software to supercharge startup finances for speed and reliability. Through its innovative combination of AI-powered automations and expert human support, Zeni helps startups get on top of the financial processes that contribute to healthy cash flow. Not only that, but it simplifies bookkeeping, speeds up vendor payments, and ensures reimbursements are properly handled.

“A startup’s financial health depends on having enough money to cover expenses, remain operational, and pursue opportunities,” Shinde explains. “A healthy cash flow supports those key goals. It goes far beyond simple bill payment. With the right cash flow management strategies, startups enhance their competitiveness and enable the achievement of long-term goals.”

Demystifying cash flow

Cash flow is a real-time measurement showing the movement of money into and out of a company. Unlike profit, which is determined by subtracting expenses from revenue and can include non-cash items like depreciation and amortization, cash flow is focused strictly on the inflow and outflow of cash. Profit measures a company’s overall financial performance, while cash flow shows its ability to meet short-term financial obligations as well as invest in growth.

Cash flow is typically derived from three sources: operating cash flow, which is generated from customer payments, sales, and other income from day-to-day operations; investing cash flow, which comes from returns on investments such as stocks, bonds, or real estate; and financing cash flow, which comes from loans or other financing.

Companies should pay close attention to several factors to manage cash flow. Sales and revenue are a company’s primary income sources, fueling the bulk of its cash inflow, while costs and expenses represent the primary outflow. Tracking and analyzing these factors can provide the data needed to improve cash flow.

Accounts payable and receivable are also factors that can significantly impact cash flow. To support a steady flow of revenue, companies must ensure bills are paid on time, and invoices are collected as soon as possible.

Companies with negative cash flow often struggle to cover essential costs, having to delay payments or spend beyond their reserves. Those with positive cash flow can increase their profits by making investments and reducing debt.

Maintaining a positive cash flow is also important for attracting investors. “Startups that want to increase their appeal to investors can do so by improving their cash flow,” says Shinde. “Balancing growth in a way that allows a company to maintain cash reserves is a sign of financial control. To investors, that’s a mark of a company with potential.”

Improving cash flow

Improving cash flow starts with developing an accurate picture of inflow and outflow. A company’s checking account can serve as a central hub for monitoring key cash flow metrics. With online banking, businesses can access tools that streamline key cash flow processes and provide real-time assessments of a company’s cash flow situation.

“Startups experiencing negative cash flow should move quickly to shift the flow in a positive direction,” Shinde warns. “One way to accomplish that goal is reducing expenses. A careful review of financial statements can reveal areas where cuts can be made, such as overhead costs, materials and supplies, insurance, and employee expenses. Renegotiating contracts or finding more cost-effective suppliers can be effective in this area.”

Increasing sales and revenue will also improve cash flow. Companies can pursue this by launching new products or services, expanding their customer base, or partnering with other businesses.

“Negotiating shorter payment terms with customers can improve a company’s cash flow position,” Shinde shares. “Shorter terms allow you to get paid more quickly, which gives you more cash for addressing your financial obligations. While it does not exactly increase your revenue, it improves your access to the revenue you are earning.”

Raising funds is another solution for cash flow issues. This can involve applying for loans or seeking support from investors. For startups pursuing this course, having a solid business plan and financial projections is crucial.

Business credit cards can provide a short-term option for raising funds, giving companies a flexible way to cover expenses or invest in growth opportunities. However, companies must be careful not to allow interest charges on credit card spending to negatively affect cash flow.

Healthy cash flow is a fundamental building block for startup success. Those who master it acquire the resources needed to mitigate risks, capitalize on opportunities, and gain an advantage in today’s competitive startup landscape.