It finally happened – investors saw your vision, you raised a Series A, and now you have the green light to grow as quickly as possible. Now what?
Or perhaps you’re building an MVP and scrapping for revenue. Your idea has potential, but you have to diligently manage resources until you can raise seed funding.
Regardless of where you are in your journey, cash flow management for your startup will be crucial. In this article, we’ll cover the fundamentals, the single most important KPI you can track, and how cash flow differs from funding stage to funding stage.
Fundamental Financial Hygiene
Startup founders are often visionaries who like to move fast and break things, not accounting majors with a penchant for the nitty gritty. But when it’s time to develop a budget for your startup or present progress to investors, you’ll need two foundational pieces:
- A bulletproof bookkeeping system
- A three-statement financial model
Collectively, the income statement, balance sheet, and cash flow statement show your revenue, expenses, debt, equity, and cash flow over time. This three-statement model is your bird’s eye view of startup finances. Keeping track of where money goes from day to day – bookkeeping – is the basis of a three-statement model. You can’t have one without the other.
Clean books reflect well to investors, allow you to make informed strategic decisions, and optimize your accounts payable and accounts receivable systems. Building a system to track this information will pay dividends in the future.
The Startup Cash Flow Statement
On balance, what does a good startup cash flow statement look like?
When accountants build cash flow statements, they break them into three sections:
- Operational: Funds from core business activities, such as sales, marketing, and overhead.
- Investing: Expenses that will pay dividends over the long term.
- Financing: Capital coming into the company from either equity or loans.
If you’ve raised a Series A, you’ll be flush with cash from financing and have plenty of money to invest. You’re in a growth stage, so while profitability is important in the long term, your investors will be more concerned with bottom-line revenue figures. What remains is balancing operational and investing flows.
On an ideal cash flow statement, operational flows are net neutral, and you’re aggressively investing. In other words, if you stopped making long-term investments today, your short-term costs and revenues would break even, and the company would be indefinitely sustainable.
Aiming for operational neutrality is a solid benchmark but not a one-size-fits-all approach. Startups make tradeoffs between growth and profitability all the time, where short-term losses and high burn rates are acceptable while acquiring market share. Some industries, such as manufacturing, are capital-intensive. They’ll need longer timelines before they’re net neutral.
Seed Stage Cash Flow Management
Your current priorities should be building an MVP, testing your revenue model, and achieving product-market fit. Funds come from friends and family, personal savings, or if you’re lucky, an angel investor. Cash flow from revenue will be inconsistent or nonexistent, so the goal is to stretch every dollar you have while building a compelling business case.
You should regularly monitor your burn rate and financial runway. Focus on optimizing expenses and reducing unnecessary costs. If you need specialized expertise, it can be more cost-effective to hire a freelancer than a full-time employee.
Where to Invest After a Series A?
Finding quality talent will be one of your biggest challenges and most important investments. Tech and SaaS companies dominate the startup industry; without quality engineers, they’d never succeed. Beyond startups, the largest expense for nearly every company is payroll. Investing in people is key.
Luckily, startups are uniquely positioned to incentivize prospective employees. Between equity compensation and the promise of working on innovative projects that can impact the world, many young top-tier candidates are attracted to the industry.
After investing in employees, startup wisdom often diverges into two camps: improve your product or spend more on sales and marketing.
Balancing Operational Expenses and Revenues
The number of data points you could track is overwhelming, but not all KPIs are created equal. If you’re short on time, there’s just one ratio to watch: customer acquisition cost (CAC) vs lifetime customer value (CLTV).
Nearly every critical piece of information for a startup eventually funnels here. Conventionally, a 3:1 ratio is considered a healthy CLTV to CAC ratio, and mismatches signal both inefficiencies and opportunities. If the ratio is too low, you spend more money acquiring customers than they’re worth. If the ratio is high, it means you have an opportunity to scale while remaining profitable.
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