What is cash flow and how to control it to ensure the viability of your startup?

The goal of any emerging company, regardless of its stage of growth, is to have balanced finances. And one of the elements that best indicates the viability of a high-growth company, as well as its development possibilities, is the so-called cash flow.

Cash flow is the reference indicator that shows the cash result (net cash inflows and outflows) over a given period of time. Through cash flow analysis, startup managers or future investors are given an idea of the company’s capacity to generate liquidity.

However, this indicator not only allows entrepreneurs to know the current situation of the business, but also to measure the next steps to be taken to ensure its sustainability. With a correct cash flow analysis and forecast, the company can evaluate the possibility of making new investments, prepare for future liquidity shortages or seek new sources of financing.

Types of cash flow

Depending on the source of cash, it is possible to calculate different types of cash flow results:

• Operating cash flow (OCF). This is generated from the normal activity of the company. Cash inflows from these types of activities include the sale of products or provision of assets, while cash outflows include general expenses such as personnel costs or those derived from suppliers.
• Investment cash flow (ICF). This includes the outflows for investments made by the company in the acquisition of fixed assets, machinery, electronic equipment and the inflows for “divestitures”.

Financial cash flow. This is generated from the company’s financial activity. Cash inflows may arise from proceeds from the issuance of shares or debt, while outflows include repayment of loans or bonds, share repurchases or dividend payments.

How to calculate cash flow

To measure a company’s cash flow, it is essential to first determine a time period. The recommended analysis period is one quarter, but it can be extended to one year. Once this step has been taken, the entrepreneur must collect all the income (sales, loans provided, debt collection), as well as all the expenses derived from the activity (office rent, salaries, commissions, etc.).

Once this data collection is completed, the data is captured in a spreadsheet. The columns correspond to months and the rows to income and expenses. The result will be the difference between the two concepts and will show both the net cash balance (the liquidity generated each month) and the accumulated cash balance, i.e. the cash accumulated during the period analysed.

Translated to a simple definition, cash flow is the result of the difference between cash inflows and outflows. If the resulting figure is positive, the company has the capacity to pay its suppliers, repay its loans, remunerate shareholders and employees or make future investments with the remaining liquidity generated. If negative, product margins may be too low, or overhead costs may be too high. In emerging companies, negative cash flow is common, but if the situation becomes serious, they may go bankrupt or be sold unless there are investors willing to inject more money.

How to achieve positive cash flow

In periods of economic uncertainty or instability, startups face the challenge of maintaining a positive balance sheet. Achieving it not only shows the good development of the company, but also serves as an argument to attract investors, carry out expansion processes or access different financial products offered by players that promote the entrepreneurial ecosystem such as BBVA Spark. And there are several ways to achieve this:

• Use new technologies. This saves on costs and automates processes. To help with this, there are different software such as Billage or SeeDCash, which make it easier to control the company’s cash flow and automatically forecast receipts and payments.
• Monitor debt collection. Keeping up to date with the agreed deadlines for debt collection will help to obtain an adequate financial balance.
• Oversee expenses and income. Adjusting business costs avoids mismatches in the company’s accounting. Cash flow forecasting is essential to be aware of when costs need to be adjusted.
• Build customer loyalty. Developing loyalty strategies opens up recurring revenue streams for businesses.
• Negotiate new agreements with suppliers. The review of supplier agreements offers the possibility of obtaining better conditions that have a positive impact on the company’s cash flow.

For startups, good financial health is key for the project to have the necessary strength to face unforeseen events or to undertake new growth strategies. Using the perspective offered by a cash flow analysis will allow a clear view of the future that awaits the company.