Paulina Wojciechowska

Paulina Wojciechowska

PR Menedżer

Cash flow is that element of running a business that every startup should make an extremely priority.

In the simplest terms, they determine how much money flows in and out of your business over a certain time horizon, which is perfectly illustrated by the financial statements for a given reporting period. A positive cash flow is most desirable, indeed necessary. This occurs when the cash flowing into the company exceeds the cash leaving the company. An inflow occurs primarily when the company generates cash from operating activities related to the sales issue, which is most desirable as it builds a solid foundation for the future. Of course, there are other possibilities of inflow of cash to the company, e.g. through investments of external entities in the startup, loans taken out, sale of company assets and similar financial and investment activities.  On the other hand, the outflow of cash from the company is connected with its operating activity from the cost side, i.e. occurring fixed and variable costs, e.g. salaries for employees, operating fees, materials necessary for production/development of the product/service. I am omitting here financial and investment expenses, which of course also have an impact (if they occur in the startup) on building the financial condition of the company.

It should be noted that the profits generated by a startup (in simple terms, revenue minus costs) do not equate to positive cash flow. Figuratively speaking, accounting profit is not equal to the level of cash in the company. a This has a broader dimension because, as I mentioned earlier, this can be seen perfectly in the financial statements, which also include the balance sheet not mentioned earlier, and where we have elements such as inventory, receivables or payables. The key element is the ability to manage working capital in the company, which includes the rotation of inventories, receivables and trade payables, which are the most important elements in the initial phase of any startup’s life.

At this point we come to the key aspect of skilful financial management in a company, especially in the initial phases of its development. I know from my professional experience from my professional experience, I know that most founders of start-ups focus on business development (which, of course, has a positive aspect), however, they neglect the financial part. The main argument of the founders is that we have an external accountant who handles the finances and documentation of the company. But accounting is not the only thing that manages a startup from the financial point of view. Accounting keeps the books, settles invoices, taxes, prepares reports. However, strictly management is the responsibility of the board or a delegated person with appropriate competences. And it is usually the case that the originators’ interest in the financial situation increases when there is no money in the bank account or its level is so low that there will not be enough money in a month to pay employees. Then begins a frantic and nervous search for cash by looking for a potential new investor “at the moment”, quick loans, and all this eventually leads to the fact that sometimes the startup is on the verge of bankruptcy.

The key mistakes made by originators at the initial stage of business activity include:

  1. Too optimistic sales forecasts – it is mainly about the sales volume forecast, in many cases the originators assume that from the very first months the revenues will record a jump. This translates into million-dollar sales after just one to two years of operation. Of course, Excel can accept anything, but this is not what it is about. Revenue forecasts must have a real market reflection in accordance
    with the potential and processing capacity of the company;
  2. Lack of control of expenses – this issue refers to the lack of keeping costs in check
    Lack of expenditure control – this issue concerns the failure to keep costs in check in the initial months of operation. It is necessary to prepare a budget with realistic cost assumptions, which must then be scrupulously enforced. Experience shows that budgets are one thing…life is another;
  3. Lack of control over working capital in the Company – the ability to manage the area of stocks, receivables and trade liabilities is even necessary for the proper functioning of the Company. Stocking up in the Company entails expenses, and in the case of start-ups, in many cases goods have to be paid for in advance. On the other hand, if sales appear, then the inflow of receivables from contractors in many cases is extended to the maximum, which sometimes creates blockages – overdue receivables, therefore skilful debt collection is even required. Short-term receivables also include VAT settlements (input VAT), which can also be claimed back, and this applies to Startups which in the first months incur mainly costs, while there are no sales (then the first revenue invoice will be necessary to be able to make a claim for reimbursement) or only a small level. On the other hand, you need to be able to meet your commercial obligations by, among other things, working out longer invoice maturities with your clients.

All these aspects show how crucial liquidity management is for a startup, reflected on many levels. Without ongoing monitoring of the company’s financial situation, it is impossible to efficiently manage the business from both an operational and financial perspective. Startup founders must realise that without a coherent business and financial policy, it is impossible to build a solid foundation in the company.

In summary, operating cash flow (because we mainly focus on it) shows how much money a company has generated from operating activities in a given period. The cash flow consists of NET PROFIT + AMORTISATION + CHANGES IN CURRENT CAPITAL.
The higher the net profit, the higher the amortisation and depreciation or the better the working capital management (receivables coming in fast, inventories rotating fast, extension of liabilities at suppliers), the better the operating cash flow.

The above text is intended to give a general outline of the topic (“knowledge in a nutshell”) and to draw the attention of originators to the proper management of financial flows in a company.


Author: Ireneusz Wieczorek, Business Analyst of CARLSON EVIG ALFA fund.

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