For many start-ups, it is crucial to have access to outside capital at the beginning of their business activities - be it through private equity from professional investors, business angels or traditional bank loans. A special form of debt capital is funding, which is awarded by numerous organizations and institutions specifically for particularly innovative or disruptive business ideas.

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

Banks and investors usually require mandatory budgets in addition to any collateral. However, these plans are often initially based on assumptions and expectations that are difficult to verify. In fact, the initial financial plans often reflect pure forecasts, as there are rarely empirical values that allow a precise prediction of long-term business development. In addition, founders often lack the financial know-how to create reliable and well-founded calculations.

However, this deficit becomes particularly apparent after the successful financing. The initially presented business planwhich was often conceived at a high-level, then only serves as a rough guide. As soon as the operational business has started, the precise cash flow management for start-ups/small companies takes center stage - and becomes a must.

Why cash flow management is particularly crucial for startups

The calculation and planning of cash flows are important for every company, but they are particularly critical for start-ups. This is because they are inherently more susceptible to financial bottlenecks have. While established companies have reliable revenue streams and a solid financial base, companies at the beginning of their start-up are often confronted with considerable uncertainties. In the early stages, they often do not yet have a constant flow of sales and their costs can be irregular and difficult to predict. The consequences of inadequate cash flow management are more serious for start-ups more serious for start-ups, as they often have less of a financial buffer than larger companies.

One of the main problems is that many new and small companies often underestimate their cash burn rate. Young companies tend to have high initial investments, be it for product development, marketing or building a team. At the same time, revenue at this stage is still uncertain or minimal. This situation often leads to them experiencing liquidity bottlenecks more quickly than expected. Such situations can have serious consequences, because without sufficient Cash position start-ups are unable to cover ongoing operating costs such as salaries, rent or supplier payments - which can lead to rapid failure in the worst case.

The special challenge for young companies

What makes this situation even more complicated is the fact that there is often there is often no reliable historical data on which start-ups can base their Cash flow planning . Where established companies can rely on years of experience and predictable business cycles, they lack this basis. Their financial plans are inevitably based on assumptions that often turn out to be inaccurate, as developments are often difficult to predict. Another factor is the typical dynamics of newly founded companies: The business model may still be in the testing phase, leading to frequent adjustments and a fluctuating revenue situation. Anyone who has already worked in a start-up knows exactly what is meant by this.

This puts many founders in a dilemma: on the one hand, precise planning is essential to ensure survival and build trust with investors and banks. On the other hand, there is often a lack of data and experience to carry out really solid planning. This uncertainty makes cash flow management for start-ups all the more important, as it requires flexibility and adaptability.

The way out of the dilemma

The use of flexible tools can help enormously here. Instead of relying on rigid plans, the cash flow management of start-ups should be continuously adapted and updated based on current business developments. Modern cash flow management tools for startups and small businesses, such as Commitly, allow them to monitor finances in real time and revise planning on a regular basis. By linking bank accounts and categorizing income and expenses, young companies can better estimate how their Cash position will develop in the coming weeks and months.

The way it works is very simple: simply integrate all of the company's bank accounts thanks to practical integrations invite other team members into the workspace and collaborate. All previous transactions are immediately visible, can be categorized (which will delight the heart of any tax consultant) and noted as future income or expenses. This includes, for example, the monthly office rent, the fixed fee for the first clients or larger investments - such as the expansion of your own online store, the purchase of technical equipment, etc.

Good cash flow management in start-ups is the key to Cash position

A detailed report generated by the software based on the data entered not only gives the startup a comprehensive picture of its current financial situation, but also an honest and sophisticated Cash flow planning. This is invaluable, as it enables financial bottlenecks to be identified at an early stage and targeted countermeasures to be taken.

And to be honest: What banks and investors are interested in is not the total turnover of the first financial year, but the Cash position of the company. Because at the end of the day, a financier wants to know that a company in which he has invested can continue to exist and has the financial leeway to further develop the business model and build up resources (e.g. personnel). A bank wants to ensure that the company can repay the installments reliably and on time.

Conclusion: Cash position as a success factor

Or as one of Commitly's friends put it: 

"If we only have 5 minutes in the investor meeting or in the vote, we only talk about Cash position."

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

To summarize: If you have Cash position under control, you create the basis for sustainable growth and long-term success. Start-ups should therefore rely on a solid calculation of the Cash position and not just rely on sales forecasts.

Credits: Photo by rawpixel on Unsplash