What cash flow management means for startups

For many startups it is crucial to draw on outside capital at the start of their business activities – whether through private equity from professional investors, business angels or classic bank loans. A special form of outside capital is grant funding, which numerous organisations and institutions award specifically for particularly innovative or disruptive business ideas.

But what does a young company need in order to obtain such financing?

Alongside any collateral, banks and investors usually require mandatory projections. Yet at the outset these plans are often based on assumptions and expectations that are hard to verify. In fact the first financial plans frequently reflect pure forecasts, because there is rarely any empirical experience that would allow a precise prediction of long-term business development. On top of that, founders in many cases lack the financial expertise to produce robust, well-founded calculations.

This shortcoming becomes particularly obvious after the financing has been successfully secured, however. The business plan presented at the beginning, often designed at a high level, then serves only as rough guidance. As soon as day-to-day operations start, precise cash flow management for startups and small companies moves centre stage – and becomes a must.

Why cash flow management is particularly crucial for startups

Calculating and planning cash flows is important for every company, but for startups it carries particularly critical weight. That is because they are by nature more susceptible to financial bottlenecks. While established companies have reliable revenue streams and a solid financial base, businesses at the beginning of the start-up phase are often confronted with considerable uncertainty. In the early stages they often have no steady flow of revenue yet, and their costs can be irregular and hard to predict. The consequences of inadequate cash flow management are more serious for startups because they often have less of a financial buffer than larger companies.

One main problem is that many new and small companies often underestimate their cash burn rate, that is, their consumption of capital. Young businesses tend to have high initial investments, whether for product development, marketing or building a team. At the same time, income at this stage is still uncertain or minimal. This situation frequently means that they run into liquidity squeezes faster than expected. Such situations can have serious effects, because without sufficient liquidity startups are unable to cover ongoing operating costs such as salaries, rent or supplier payments – which in the worst case can lead to rapid failure.

The particular challenge for young companies

What makes this situation even more complicated is the fact that there are often no reliable historical data on which startups can base their cash flow planning. Where established companies can draw on years of experience and predictable business cycles, that basis is missing here. Their financial plans are inevitably based on assumptions that often turn out to be inaccurate, because development is frequently hard to predict. Another factor is the typical dynamic of newly founded businesses: the business model may still be in the testing phase, which leads to frequent adjustments and a fluctuating income situation. Anyone who has already worked in a startup knows exactly what is meant by this.

That puts many founders in a dilemma: on the one hand precise planning is essential in order to secure survival and build trust with investors and banks. On the other hand the data and experience needed for genuinely solid planning are often missing. This uncertainty makes cash flow management for startups all the more important, because it calls for flexibility and adaptability.

The way out of the dilemma

This is where flexible tools can help enormously. Instead of relying on rigid plans, startups’ cash flow management should be adjusted continuously and updated on the basis of current business development. Modern cash flow management tools for startups and small companies such as Commitly allow them to monitor their finances in real time and to revise their planning regularly. By connecting bank accounts and categorising incoming and outgoing payments, young businesses can better judge how their liquidity will develop over the coming weeks and months.

The way it works could hardly be simpler: connect all the company’s bank accounts thanks to convenient integrations, invite other team members into the workspace and work together. All past transactions are visible immediately, can be categorised (which delights every tax advisor’s heart) and can be recorded as future income or expenditure. That includes, for example, the monthly office rent, the fixed fees from the first customers or larger investments – such as expanding your own online shop, buying technical equipment and so on.

Good cash flow management in startups is the key to liquidity

A detailed report generated by the software on the basis of the data entered gives the startup not only a comprehensive picture of the current financial situation, but also honest and sophisticated cash flow planning. That is invaluable, because it makes it possible to spot financial bottlenecks early and to take targeted countermeasures.

And to be honest: what interests banks and investors is not the total revenue of the first financial year but the company’s liquidity. Because at the end of the day a financier wants to know that a business they have invested in can continue to exist and has the financial room for manoeuvre to develop the business model further and build up resources (in staff, for example). A bank wants to be sure that the company can repay the instalments reliably and on time.

Conclusion: liquidity as a success factor

Or as a company friendly with Commitly put it:

“If we only have 5 minutes in an investor meeting or a review, we talk about liquidity and nothing else.”

This quote shows just how important cash flow management is for startups and above all for their success. It is not only a tool for monitoring financial health, but also a key factor in building trust with investors and banks.

In summary: whoever has liquidity under control creates the basis for sustainable growth and long-term success. Startups should therefore rely on a solid calculation of liquidity from the very beginning and not depend on revenue forecasts alone.

Credits: Photo by rawpixel on Unsplash