Cash Flow for Start-ups: How to Manage Your Money

This article explores everything a new business owner needs to know to manage their start-up’s cash flow.

• Cash flow is the movement of money; “in the green” is positive (money left over), “in the black” is breaking even, and “in the red” is negative (running at a loss).
• Proper cash flow management is crucial, especially for start-ups which often face high initial expenses and low sales.
• Prepare a Cash Flow Statement using accounting software or a template, tracking transactions across three categories: Operating, Investment, and Financing activities.
• Perform a Cash Flow Analysis to identify financial health, and if you have negative cash flow, you must increase revenue or reduce costs by raising prices, adjusting marketing, or trimming expenses.
• For deeper analysis and strategies, consult an accountant or look into the practical steps and templates found in the Roadmap to Success.

Read on for the full breakdown.

By Mark Johnston

Mark Johnston is a Business Advisor at TEDCO Business Support Ltd, combining banking expertise and first-hand business experience to guide entrepreneurs from start-up to growth.

All posts by Mark

Your business can’t function without a healthy cash flow, so it’s vital that you’re aware of what’s coming in and going out.

In fact, it’s so important that it’s one of the key points we explore in Stage 3 of the Roadmap to Success https://www.durhamstartups.co.uk/task/understanding-financial-forecasting/ , where you’ll find practical steps and templates to help you understand and manage your finances more confidently.

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-up’s 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 have 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 of time, you’ll eat away at your savings and 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, there are severe consequences for your business if you fail to properly manage your cash flow.

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. You can also use the practical guidance and templates shared in the Roadmap to Success to help you get started with confidence.

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.

You want as many actionable insights into your business’s finances as possible. So, 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. You could:

• Raise your prices.
• Adjust your approach to sales and marketing.
• Trim 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 generate 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.

Next Steps

To get a deeper analysis of the incomings and outgoings within your business, we recommend you speak 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.

You can also work through the Roadmap to Success, where you’ll find in-depth, practical steps and templates designed to help you understand financial forecasting and manage your business finances more effectively.

If you’re looking to get a better handle on your cash flow, Durham Startups is here to help. Call us on 03000 261261 to speak with one of our startup solutions advisors and get practical support for growing your business in County Durham.