Startup financial projections: a manual to create a cash flow statement

Here is a step-by-step instruction on how to create a cash flow statement for startups

If you want to wow your investors, and not end up like WeWork, you need to take care of your balance sheet, income statement, and cash flow statement. At the time when the income statement can be manipulated to look more profitable, sort of like a photoshopped BMW on your Tinder profile pic, a cash flow statement is more of an in-person meeting, and you show up on a Ford.
So keep reading about how to not only score a date with investors but also buy them breakfast.

What is a Cash Flow Statement?

It is the system that tracks the cash coming in and going out of the startup over a specific period. If you want to know how well the company generates cash to pay its debt obligations and fund its operating expenses, you go straight to CFS. Being one of the three main financial statements, the CFS complements the balance sheet and the income statement.

Elements of a Cash Flow Statement

1. Cash Flow From Operating Activities. This is the amount of cash acquired or spent that comes from running the company’s CORE business.

For example, operating activities may include:

• Payments received for products and services
• Salaries paid to employees
• Payments made to suppliers
• Rent payments
• Interest payments
• Income tax payments

2. Cash Flow From Investing Activities — cash acquired or spent from made from the company’s investments.

As a startup, you may consider investing in buying or selling an asset, like an office building, manufacturing equipment, or a security system. The cash flow regarding these types of investment activities shows how much cash has been generated.

A startup can face a negative cash flow. Don’t worry, it happens to everyone. The downward tendency of cash may be solely related to significant amounts of cash being invested back into the startup when it comes to investing activities.

When does it happen?

This may occur if your startup invests money back into research and development, creating a temporary decline in cash. The word negative here does not decentrally imply its subjective meaning as something bad, as the founders are investing in the startup’s long-term advance.

3. Cash Flow From Financing Activities — cash earned or spent on financing the company. (E.g. Loans, lines of credit, share buybacks, issuance of new shares, dividends, etc.)

Financing activities include any cash received from investors or banks, cash/dividends paid to shareholders, or corporate loans’ repayment.

This gives founders, strategic advisors, and investors insights into a startup’s cash flows. For instance, a positive cash flow from financing activities is an indicator that your startup has increased its asset levels.

Besides, like cash from investing activities, a negative number can evidence a commitment to the company’s further growth, like slowly paying off a long-term debt or returning dividend payments to shareholders.

The Difference between an Income Statement, Balance Sheet, and Cash Flow Statement

Income statement: determines how much profit a company is making or losing at a certain point in time. 

It is where you can find details about a company’s income. Starting with the company’s revenue, various costs are subtracted to arrive at four different income metrics.

• Gross income: The formula is sales minus the expenses of goods sold and depreciation. Gross income tells whether product production is efficient.
• Pre-tax income summarizes the expenses, such as interest income and interest paid on debt, as well as charges and credits that are not linked to the company’s core business operations.
• Net income accounts for pre-tax income, minus all income taxes, current and deferred, that a company pays on its earnings. This is your go-to indicator of a company’s overall profitability during a specific period.
• Operating income: Gross income subtracting rent, managerial costs, and research & development.

Based on this, you can determine the company’s profit margins if you divide any of the income metrics by the revenue, which can help to assess how efficiently a company is running and to compare it to competitors.

Balance sheets show a company’s financial position regarding how many assets they have as opposed to liabilities. The balance sheet is divided into three sections — assets, liabilities, and equity. A company’s assets must be equal to its liabilities plus equity.

Assets are generally listed according to their liquidity, or the ease in which they can be sold or otherwise disposed of. They are separated into two subcategories: current and long-term.

Cash flow shows…well,  you really should remember by now. However, get acquainted with the meaning of the term net cash flow. This is a figure that is reported on a company’s financial statements. It is calculated by subtracting a company’s total liabilities from its total cash.

How to calculate Cash Flow?

You can use two methods to calculate your cash flow.

Direct. Add up all the startup’s cash payments, including the ones received from clients, those paid to suppliers, and any paid out in salaries and wages. Use your beginning cash balance and ending cash balances over a specific period to track your progress. It could be a month or quarter, further examining the net increase or decrease over that period.

With the indirect method, operating cash flow can be determined by taking the startup’s net income figure directly from its income statement. The income statement is established from an accrual basis, which means that income is only recognized when earned and not received.

When Should a Startup Make a Cash Flow Statement?

On your first launch. Your cash flow statement mirror any initial cash input from the founders in addition to any small business loans, giving you an opportunity to record these as inflows of cash. And include the money that you have already spent on hardware&software stuff, your SMM manager’s salary, and a MacBook for your assistant.

Why Should a Startup Track Its Cash Flow?

Not keeping an eye on your burn rate and running out of cash isn’t anyone’s idea of fun. Controlling your burn rate means knowing how much time and cash you have before seeking extra help from investments. Procuring investment usually takes no less than 6 months.

Seeking investment becomes a top priority if your burn rate only covers you for only 3 months.

You become friends with benefits like firing up invoices, cutting unnecessary costs and debts, and allowing you to adjust inventory. 

Access the accounts every day to know how much money is there. And you will for sure know ]where your cash is coming from, what expenses you’ll encounter the next day, month, etc. 

Examples of Startup Cash Flow Templates💸

Having worked with over 200 clients, we know how confusing the beginning can be, so we prepared some guidelines for filling out a cash flow statement template for the first time.

STEP 1. Put down your company’s total cash balance

At the beginning of a selected time period (depending on how frequently you do this analysis – once a month, quarterly, annually, etc.) put down your company’s total cash balance from all accounts.

STEP 2. Divide your cash inflows and outflows into the main categories 

• operating activities (these include cash activities related to net income, such as manufacturing, marketing, and selling your product);
• investing activities (which mean cash activities related to non-current assets, for instance, purchases of physical assets or investments in securities);
• financing activities (that reflect how your company raises capital and pays it back to investors).

STEP 3. Combine cash inflows and outflows

Combine earnings and outgoings and add/subtract them from your starting point from your total cash balance. This will then tell you if your “bottom line” is in red or black. 

If you notice that your cash flow regularly slides into red towards the end of a given period, that can be an indicator that the business needs to curb its spending at the beginning of each month. In other words, tighten your belt. 

It’s best to conduct a cash flow analysis at least once a month, but you can do it as often as you want since the information is always available when the statement is set up correctly.

Having this data, when consulting an accountant or a financial advisor, will let you ask more specific questions and make an informed decision on where to spend or save money.

A tip, if your business has had good revenue, you could be advised to make a large purchase to lower your tax bill. 

Follow the link to see an example from the Corporate Finance institute

The connection between Cash Flow, Balance Sheet, and Income Statement

All three accounting statements are important for understanding and analyzing a company’s performance from different angles. The income statement is a sneak peek into the core operating activities that generate earnings for the firm.

The balance sheet and cash flow statement rather focus on the capital management of the firm in terms of both assets and structure.

Companies that perform the best in this area are more likely to be ranked higher in operating efficiency, asset management, and capital structuring.

Management is responsible for overseeing these three levels in a way that serves the best interest of the shareholders, and the interconnected reporting of these levers is what makes financial statement reporting so important.

Benefits💡

Most startups fail because they run out of cash. Therefore, tracking your money the same way an overprotective mother tracks her child’s phone can contribute to the success of your business.

Preparing a cash flow statement for your start-up provides the following benefits:

• Verifies your profitability position
• Verifies your liquidity position
• Verifies your capital cash position
• Helps you better manage your cash, currently and in the future

6 Tips on Managing Cash Flow📈

We hope that by now, creating a dynamic, yet comprehensive cash flow statement is on your agenda and that this deep dive cleared things up for you. If you still have some questions, don’t hesitate to reach out to our team for an obligation-free consultation.

Remember, that a good relationship with finance always has a high ROI (*Return On Investment)📈

Your Fuelfinance 💸