As a startup founder, you’ve likely heard the phrase, “Cash is king.” But it’s time to take it a step further - because if cash is king, cash flow is queen, and it’s the queen that keeps the business running smoothly day after day.

Managing cash flow isn’t just about knowing how much money is coming in, it’s about understanding when it’s coming in, how it’s going out, and what’s left to keep the business thriving. For startups, where every euro counts, poor cash flow management can quickly become a recipe for disaster. Here’s why cash flow management matters and how to get it right.

Cash Flow: More Than Revenue Minus Costs

At a glance, cash flow might seem straightforward: revenue comes in, costs go out, and the difference is your cash position. But it’s much more complex than that. Timing plays a critical role, especially when dealing with:

• Days Sales Outstanding (DSO): How long it takes to receive payments from customers.

• Days Payable Outstanding (DPO): How quickly you need to pay your suppliers.

• Inventory Turnover (if applicable): The speed at which you sell and replace stock.

  
  

For example, if your suppliers need payment in 30 days, but your clients take 60 days to pay you, you’re essentially pre-financing two months of operational costs. This can put immense pressure on your cash reserves.

What this means for startups: You might need twice as much working capital on hand just to keep operations running smoothly.

Cash Flow vs. Revenue: The Critical Difference

One of the biggest misconceptions among startup founders is equating revenue with cash flow. Revenue shows growth, but it doesn’t mean you have cash in hand to pay salaries or fund operations.

Take this scenario:

• You close a €100,000 deal in January but have a 90-day payment term.

• Meanwhile, you’re paying €50,000 in monthly expenses.

  
  

Without proper cash flow planning, your business can run out of money despite strong revenue numbers.

The Domino Effect of Poor Cash Flow

Delayed payments, unexpected expenses, or poor forecasting can quickly create a domino effect:

• You can’t pay employees on time.

• You delay supplier payments, damaging relationships.

• You miss growth opportunities because funds aren’t available.

  
  

For one client, we compared two scenarios:

• A DSO of 45 days required €40,000 in bridge funding.

• A DSO of 60 days required €150,000 - a massive difference for a seemingly small delay.

  
  

This demonstrates how even a minor change in cash flow timing can significantly impact funding needs.

Strategies to Optimise Cash Flow

Managing cash flow effectively requires a combination of strategic planning and proactive management. Here are some practical steps to optimise both inflows and outflows:

A. Boost Cash Inflows

• Encourage upfront payments: Offer discounts for annual payments, which not only improve cash flow but also reduce customer churn.

• Optimise payment terms: Shorten payment terms with customers where possible and incentivise early payments.

• Alternative revenue streams: Explore financing options like safe agreements or asset sales (e.g., selling and leasing back office space).

  
  

B. Manage Cash Outflows

• Extend supplier payment terms: Negotiate longer payment terms with suppliers to free up cash.

• Optimise inventory: If you manage stock, ensure quick turnover and avoid overstocking. Just-in-time supply chain management or drop-shipping can reduce upfront inventory costs.

• Monitor operational costs: Regularly review expenses and eliminate unnecessary spending.

The SaaS Perspective: Managing Cash Flow Without Inventory

For SaaS startups, the focus shifts from inventory management to maximising recurring revenue and managing subscription lifecycles. One effective strategy is to push for annual upfront payments, offering discounts to incentivise this behaviour.

Why? Annual payments provide a lump sum of cash, reducing reliance on other funding sources like loans. This approach allows you to self-finance growth and smooth out revenue variability.

Should You Consider Bridge Funding or Factoring?

For startups facing cash flow gaps, bridge funding or factoring can be lifesavers:

• Bridge funding: Provides short-term financing to cover expenses until revenue arrives.

• Factoring: Allows you to sell invoices to a third party for immediate cash, minus a small fee (typically 1-5%).

  
  

These tools ensure you have the liquidity needed to keep operations running, even during extended payment cycles.

The Key Metrics Every Founder Should Track

Cash flow management isn’t just about balancing the books - it’s about understanding the metrics that drive financial health:

• DSO (Days Sales Outstanding): The lower, the better; aim for quick payments from customers.

• DPO (Days Payable Outstanding): Higher values can ease cash flow but may strain supplier relationships.

• Cash Conversion Cycle (CCC): Tracks how long it takes cash to flow through your business.

By regularly monitoring these metrics, you’ll gain insights into where your cash is tied up and how to improve efficiency.

The Real Cost of Poor Cash Flow Management

Failing to manage cash flow effectively can lead to:

• Missed payroll, which affects team morale and retention.

• Lost opportunities, such as delayed product launches or scaling efforts.

• Increased reliance on costly loans or equity dilution to cover shortfalls.

Cash flow management is the lifeline of any startup. It’s not just about having money in the bank - it’s about knowing when it comes in, where it’s going, and how to make it work for you. By optimising cash flow, you’ll reduce financial stress, seize growth opportunities, and ensure the longevity of your business.

At Startup Finance, we help founders master their cash flow through tools like the Startup Financial Health Snapshot. Ready to take control of your finances? Let’s build a strategy that works for you.