Feb 10, 20233 min read

The Importance of Cash-Flow for Start-Ups.

Man looking at financial graphs on a apple mac air — Cash-Flow is critical for Start-Ups.

Cash-flow is the lifeblood of a start-up, as it is critical to the success and survival of the business. Simply put, a Start-Up not generating positive cash flow is in a precarious position and may struggle to meet its obligations.

To give further insights into the importance of cash-flow here are some of the reasons why cash-flow is so vital for start-ups:

Working Capital: Cash-flow is used to fund the business's day-to-day operations, such as paying employees, buying supplies and maintaining equipment. This is particularly important for start-ups trying to establish themselves in a competitive market.
Funding Growth: Positive cash-flow can fund future growth and expansion by hiring more staff, entering new markets or developing new products. This is crucial for start-ups looking to establish themselves and grow their market share.
Improving Creditworthiness: A start-up with positive cash-flow is more likely to be approved for loans or lines of credit from banks or other lenders. Lenders view a business with positive cash-flow as less risky and more likely to repay its debts.
Managing Risk: Positive cash-flow allows a start-up to better manage its risk, providing a cushion that can weather economic downturns or other adverse events.

Start-ups that are not generating positive cash-flow face several challenges, such as:

Insufficient Working Capital: With positive cash-flow, start-ups may be able to pay their bills, which can lead to a vicious cycle of late payments and reduced creditworthiness.
Difficulty Securing Funding: Start-ups that are not generating positive cash-flow are less likely to be approved for loans or lines of credit, which can make it difficult for them to fund growth or manage risk.
Increased Financial Stress: A lack of positive cash-flow can put significant financial stress on the start-up, which can negatively impact morale and lead to burnout among the team.

Here are some suggestions for start-ups that are struggling with cash-flow:

Reduce Expenses: Start-ups should look for ways to reduce expenses, such as cutting back on unnecessary spending or renegotiating contracts with suppliers.
Increase Revenues: Start-ups should focus on increasing their revenues by expanding into new markets, launching new products or improving their sales and marketing efforts.
Seek Alternative Funding Sources: Start-ups should consider alternative funding sources, such as crowdfunding, angel investors or venture capital, to help bridge the gap until they generate positive cash-flow.
Manage Inventory and Receivables: Start-ups should focus on managing their inventory and receivables more efficiently. This can help improve their cash-flow and reduce the risk of bad debts.

Final Thoughts

Cash-flow is critical to the success and survival of a start-up, and a lack of positive cash-flow can lead to various challenges. Start-ups struggling with cash-flow should focus on reducing expenses, increasing revenues and seeking alternative funding sources to improve their financial situation in the short term. However, if this trend does not change or show signs of changing then one would need to question the viability of such a venture. Of course, there are situations where a Start-Up metric of success might be users or app interactions that pose value over time which may not necessarily translate to immediate cash-flow. However, this strategy can only be executed either with substantial cash reserves or a very low fixed-cost overhead.

About the Author

Adam Ryan is a Professor of Practice (Adjunct Professor) at Monash University and is a principal at Watkins Bay. Adam has over twenty years of start-up experience in Australia and the USA. An expert in Company Structuring for Innovation, Strategy, Mergers & Acquisitions, and Capital for early and growth-stage businesses.