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Cash flow for start-ups: How to manage cash flow as a new business

Your business’s cash flow is its lifeblood, and analysing it is like giving your business a health check. 

It’s so important that it’s one of the key points we picked out in our article on why 60% of new businesses fail in the first three years

But what exactly is cash flow? How do you measure it, and what should you be looking out for as a start-up? 

In this article, we’ll take you through everything a new business owner needs to know to manage their start-ups cash flow. 

What is cash flow?

Cash flow refers to the movement of money in and out of your business. 

If you have a positive cash flow, you’re left with money left over at the end of the month once you’ve paid all your bills. This is known as being in the green. 

If you’re breaking even, that means there’s no money left over after you’ve paid the bills. This is called being in the black.

If you have a negative cash flow, you don’t have enough money to pay all your bills at the end of the month. This is referred to as being in the red or running at a loss. 

If your business has a positive cash flow over the long-term, you can reinvest those profits into your business to help grow it. This is key to succeeding as a business. 

If your business has a negative cash flow over a prolonged period, you’ll eat away at your savings and eventually have to start cutting back your expenses. If you continue to run at a loss, you’ll eventually run out of money and go out of business. 

How to manage your cash flow as a start-up

As you can imagine, failing to properly manage your cash flow can have severe consequences for your business. 

It’s therefore crucial that you’re always aware of how your business is doing financially so you can make informed decisions about its future. 

It’s especially important to keep a keen eye on your cash flow as a start-up, when you often have plenty of expenses and not many customers or sales. 

Here’s how: 

Prepare a cash flow statement

If you use accounting software such as Sage or Xero, your software will be able to create a cash flow statement for you with the click of a few buttons. 

If not, we recommend you create one as a spreadsheet or use a template, such as this one from Start Up Loans.

First, record your company’s total cash balance at the beginning of the period you’re looking to analyse. Your opening balance can be found on your business bank balance statement at the last day of the year. 

Then, to give you as many actionable insights into your business’s finances as possible, your cash flow statement should record the money coming in and going out of your business in three categories: 

  • Operating activities: This includes anything related to the day-to-day running of your business, from money received from sales to the money going out as staff wages. 
  • Investment activities: This covers the purchase or sale of assets that aren’t related to the daily operations of your business, such as business equipment and property. 
  • Financing: This includes any loans and investments you take on as incoming revenue and outgoing payments as expenses. 

Go through your bank statements and record every transaction under the relevant category in your cash flow statement. 

Once you’ve done this, add everything up to arrive at your closing balance. If this is higher than your opening balance, you have a positive cash flow – if it’s lower, you have a negative cash flow.  

Perform a cash flow analysis

Understanding whether you’re running at a profit or a loss is essential information for a business owner, but it’s not the only takeaway you can get from your cash flow statement. 

Firstly, if you’re in negative cash flow for several months, it’s time to start increasing revenue or reducing costs. Consider raising your prices, adjusting approach to sales and marketing, and trimming costs where you can. 

A cash flow analysis can also help you get a detailed picture of your company’s financial health. For example, compare the cash flow of your operating activities to your net sales to see how much of the revenue you’re generating is left as profit after you’ve covered overheads. As your company grows and you bring in more from sales, you want to see your cash flow increasing as well, which will show you’re still making a healthy profit margin on each sale.

We hope this article has helped you create your first cash flow statement, which is an essential tool to get insights into your company’s financial future. 

To get a deeper analysis of the incomings and outgoings within your business, we recommend speaking to an accountant, who will be able to help you manage your cash flow and come up with strategies to get out of the red and into the green.  

And if none of this comes naturally to you, don’t worry. If you’re a start-up based in County Durham, you can join our accelerator programme, where you’ll be mentored through every step of growing a new business by experts. Interested? Apply to be part of the next DCI cohort today.

The next application deadline is Friday 6th May 2022

apply now