Keeping a log of cash flow may work for an established company, but what about the small business that is just starting out? How can new entrepreneurs make sound cash flow projections?
Josh Harris, a CPA with NDH Group, a boutique tax and accounting firm with headquarters in Chicago, regularly advises small businesses in their nascent stages. He breaks the startup phase into three stages.
- Pre-Operating: The business owner must decide which milestones or metrics he or she wants to hit before launching, and how that matches up with the current funding.
- Soft launch: Releasing the product or service to market. Again, the owner must consider the goals he or she wants to hit during that time frame, along with the monthly cash burn and the spending runway that is available to achieve the stated goals.
- Growth: This is what we think of when we see a startup first experiencing success. During the growth stage, financial controls and cash flow management are critical to sustaining the growth and the long-term success of the company.
“Breaking up the startup stages allows [entrepreneurs] to get a handle of cash requirements and milestone metrics at each phase,” Harris says. “If you try to aggregate the stages, your available cash could bleed at an accelerated level at an earlier stage, causing cash-flow issues and the inability to meet your company’s goals.”
One major contributor to a successful startup is the ability to secure financing from an investor. When determining whether to invest in a business, Harris says an important trait an investor looks for in an owner is fiscal responsibility and maintaining the appropriate financial controls. If an owner can show that he or she has a firm grasp on cash flow management, the investor is more likely to gain confidence in the business.
“If you think about it from an investor’s perspective, they want to make sure cash flow is being tracked appropriately so they can measure the progress of the company,” Harris says.