The Art of Startup Finance: Financial Processes – Your Cash Flow

Kauffman Founders School, Bill Reichert, The
Art of Startup Finance, Financial Processes: Your Cash Flow So your cash flow statement starts with your
net income at the top. The bottom line of your income statement is
the top line of your cash flow statement. So your net income sort of approximates the
cash that you earned or lost in your last period, but it's not exactly right. There's some adjustments that you need to
make. Sometimes when you sell a product to a customer,
instead of giving you cash they may wait 30, 60,90 days before paying you. Now that number, that sort of deferred payment,
that's called an account receivable. But what it means is it did not come into
your company as cash. It gets included in your revenue number, so
it seems like it's part of your net profit. But for cash flow calculations you've got
to reverse out that account receivable in order to figure out what really the cash is
that you earned in this period. Sometimes entrepreneurs are afraid to bug
their customers to ask them for money. But to be honest, it's a just another point
of contact between you and the customer.

So think of it as an opportunity to engage
with your customer, not just as an important opportunity to collect those receivables. If you let your receivables get out of hand,
if you let customers defer paying for your products that can eat into your cash. And you may not be able to afford that. Go get those accounts receivable as quickly
as you can. It's critically important for your cash flow. The other thing that significantly affects
your cash flow are your accounts payable. Again, that's the money you owe to your vendors. A lot of entrepreneurs sort of manage their
cash flow by managing their accounts payable. And so if their accounts receivable are a
little bit slow, then maybe they'll slow down their accounts payable to try to keep the
cash flow level.

So, you know, your net profit, adjusted for
accounts receivable, adjusted for accounts payable, put all of that together and that
represents your cash flow from operations. And that's the core cash flow of your business. That number is probably going to be pretty
different than your net income. And so you want to make sure you understand
what's going on there, analyze why it's different and figure out is there a problem there you
need to solve. Below your cash flow from operations is the
cash that you use for capital expenditures.

And then the next part of your cash flow statement
is the cash from financing activities. And basically what that means is, if you raise
debt or you raise equity that increases your cash. If you pay off debt or you buy back equity,
that reduces your cash. You don't really want to muddy up your business
processes, i.e. your operations with the cash flow related to debt and equity. So that's why we put it on a separate place
in your cash flow statement. So now you can put all of these things together,
look at the revenues at the top of the income statement, flows down through expenses to
your net income at the bottom of your income statement. That goes to the top of your cash flow statement. You flow through your cash flow statement
to the cash at the end of the period. That flows over to your balance sheet, the
cash at the end of the period in your balance sheet. So you can see that these three statements;
your balance sheet, your income statement, your cash flow statement, they all tie together
beautifully in the end. It's really important that you understand
the relationships between these different financial tools.

When an investor comes in they are going to
want to know that you really understand the elements of your income statement, the revenues,
the costs, the expenses and how that generates income for your company. But they also want to make sure that you understand
the difference between your net income and your actual cash flow. That requires that you really know how to
manage things like accounts receivable and accounts payable. Don't just leave it to the bookkeepers and
accountants, because after all it is your business.

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