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Project cash flow – not just profit – during start-up.

Cash is everything to a new business.  How many times do we have to say this?  The days of being able to trust that there will be an investor or lender on the other end of a call or email whenever needed ended with the 2000 and 2008 bursts of those respective bubbles.  It’s entirely possible that Amazon could not be created and funded today with its planned seven years until profitability.

Early stage investors who take a chance on new businesses, often now plan their investments around the notion – or hope – that they can fund one or two rounds to lead the business to profitability.  There is no longer a guarantee that VCs and later stage investors will be waiting at the run-out point of the angel money to pick up and grow the company.

Starting_UpBusiness plans that I see often show three to five years of projections, demonstrating profitability at the end of so many months of operation.  Most every one of these uses an accrual basis for determining breakeven, never attempting to predict the cash impact of capital investment, slow collection times, large deposits upon leases, and other major items that consume cash.

[ Email readers, continue here…]  Worse yet, most show rapid gains in revenues but do not account for the extra cash it takes for working capital to grow the business at the rate projected.  If a business takes an average of sixty days to collect cash from the time it invests in the product with costs of inventory or labor, then shipping and billing, then the business will need increased working capital to pay its expenses including payroll while it waits for the cash to come in the door.

Recast your projections using cash, not accrual, as the measure for planning. An accrual statement is nice to produce.  It confirms that the business is capable of ultimately throwing off positive cash flow.  But only accurate projections of cash by the week or month as appropriate will assure the survival of a business in a rapid growth cycle, or even a startup raising just enough to make it to breakeven.

  • WeFactor

    Yes, I think that only the business that has good cashflow will survive in the business industry. Thanks for sharing this very informative and helpful article.

  • Thanks for sharing this article. I also believe that it’s very important for business to have a good cashflow in order to operate well. This is a very helpful site.

  • Yes, I totally agree with what you said. I also think that money is everything for a business especially for the new ones. I think that a business will not grow when it has no money. That’s why I think that a business owner should know different ways to fund their business. Thanks for sharing this article.

  • I strongly agree! I think that when we have a business, we should really have to handle our cash well because it is one of the main factors that runs the business. Thanks for sharing this article.

  • Eli Elliott

    Thanks for this. I have managed cash flow for both turnarounds and startups,
    and that old adage is certainly true: Cash is King.

  • I totally agree with Dave’s statements about the importance of projecting cash flow in your business plan. But not at the expense of an accrual projection of profitability and real development of your balance sheet. Any properly built business plan should present an integrated financial projection that shows income statement, balance sheet AND statement of cash flow – all integrated and presented for the entire period of the planning period. That way you can tout your breakeven point, demonstrate the development of stockholders’ equity and justify your cash projections as well.

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