One of the often-overlooked metric for assessing the performance of a business over time is an effective cash flow statement. Cash flow in the sense of financial accounting refers to the movement of funds into or out of business. Inflows occur when a business receives revenue through sales of products and provision of services to customers, whereas outflows refer to the funds that firm releases to pay for its operational expenses.
Although other financial documents like balance sheets, ledgers and journals are invaluable tools for documenting the performance of the business, ignoring cash flow statements can prove detrimental to the future of a business and can put even the most exciting firm directly on the path to insolvency. This applies in particular to tech startups, which, unlike established companies, face a unique set of cash flow problems as discussed below.
Cash Flow Problems
As a tech startup, especially one based in London, you lack as large a pool of working capital as your more established counterparts and may not be able to make smooth transitions when faced with emergencies. The emergencies may manifest in the form of slumps in sales and may necessitate drastic measures like advertising campaigns to enable you to market your products or services and compete better in the prevailing business environment.
Your startup may also lack the luxury of favourable credit terms since you have not developed a credible record of accomplishment, making it difficult for you to find willing lenders to loan you. Suppliers of stock may also demand cash payments from startups for goods delivered until they develop enough confidence and trust to supply goods on credit. Moreover, as a startups you also have to contend with late payments from customers, a factor which may leave them unable to meet their financial obligations (paying bills on time) and operate optimally.
Cash Flow Management Techniques
You will face these challenges as a tech startup, but developing a cash flow management plan that is both proactive and holistic is a remedy to these problems.
Developing a cash flow forecast will enable you plan your working capital better in order to ensure that you pay your startups operational expenses on time as well as maintain a strong positive cash flow record, which will ultimately make it appealing to creditors.
Having a perpetually cash flow record will also accord your startup the ability to invest more capital in expansion by acquiring new employees, better equipment or even opening up new subsidiaries which will go a long way in propelling the startup to the next stage of growth and away from the financial woes associated with being a startup company.
Cash flow prediction reports for your tech startup help you determine expected inflows that may help them forecast periods when your business may receive low cash inflows and to come up with measures to stabilise operations and keep the business running even in less than ideal financial situations.
Ultimately, a consistently strong cash flow record is what will keep a business from failure. The importance of developing mechanisms of properly tracking cash flow in a business can, therefore, not be overstated.
If you need more information on cash flow, you can visit our web pages on the importance of cash flow for start ups and how to be a cash flow champion during tough times. Better still, you can contact us, we have the industrial expertise and technology to assist your tech startup take advantage of cash flow statements.