Cash is king as the saying goes, running out of cash is a deadly force that has claimed the lives of many startups. Cash flow forecasting is how you’re going to combat these forces.
I’ll go over terms to know, what to include in your forecast, and the common mistakes founders make.
Before we start, I want to point out that no one is immune to cash flow woes. Don't be fooled into thinking that just because you have funding you're in the clear. Failing to prepare for the end of your runway could mean having to cut costs with layoffs later.
Cash Flow: Money coming in and money being spent by your company.
Net Cash Flow: Money in minus money out, leaving you with either a positive or negative number for each month.
Operating Cash Flow: the amount of money generated by normal company operations; excluding funding, investments, and long term-capital expenditures.
Cash Flow Forecasting: ACCURATELY projecting your cash inflows and outflows over a forward-looking period (next month, next quarter, next year, etc.)
Cash flow forecasting is important because you can use your financial data to make hiring decisions, time your fundraises, and identify where you need to allocate more resources or spend less.
Once you have your cash flow numbers laid out, you can start to make improvements if you’re negative (spending more than you’re making) or keep on the right trajectory if you’re positive.
Negotiate receivable terms: Don’t let a net 90 contract throw your business’ cash flow off, work with your clients to get paid in a timely manner.
Wait to hire or outsource: Hiring can be a sign of growth and yes that is exciting on the journey to profitability and product market fit but remember that new hires increase your burn rate. Have the discipline to hire only when necessary.
Move from monthly to annual contracts: get your clients to pay upfront and get more cash in your account.
Control your spending: only spend money on the “need to haves” for your team to operate. Cut the extra tools and fluffy spending.
There will always be unexpected costs of running a business but you can minimize the damage by having an accurate forecast with a bit of a cushion.