Most of us always focus on what is the most essential ingredient of the startup. Tech, Vision, Finance, Legal, Marketing, Execution, etc. It varies from founder to founder, industry to industry and geography. However, most startups often fail to contemplate the most important element of the business. Cash flow!
Its not profit or loss or the replenishment of cash balance through new round of funding. The underlying principle of cash flow is to analyse where & how much cash came from & where it went. While preparing budget & estimates, this is an important parameter. Essentially, this can decide the expansion plan, acquisition strategies and most importantly operational efficiency!
A newly formed startup has limited funds before the big millions are poured in by Investors. Now, expense and cash flow does not necessarily go hand in hand. For instance, Depreciation is an expense that will reduce the income without actually reducing the cash balance! At the same time, purchase of Computers may not be an expense but reduces cash balance significantly!
Hence, the first thing we need to understand while preparing strategy is cash flow. This determines the quantum of operations that can be undertaken under various spheres of business such as operations, compliance, legal registrations, marketing, tech, etc. Planning the cash flow is a tedious & tough job. But, not planning it is a very dangerous commitment that backfires the founder of the every startup sooner or later!
Factors to consider while preparing cash budgets:
- Available cash
- Cash Received
- Cash payments made
- Commitments made for expenses
- Expected Receipts
Every successful company today was once a miser company that survived the tough times! This does not mean you have to be miser but penny saved is penny earned. Take time out to plan your timeline for the period that you think you will survive without getting funds and stick to it till you actually receive funding!