Cash Flow. What is it and how to calculate it?

Cash flow is a fundamental financial metric that measures a company's financial health and its ability to generate and manage cash. In previous articles, we introduced notions about this concept, but today we want to show you in detail how to analyze and use this key financial information to optimize business operations and ensure long-term stability and growth.

Cash flow is a fundamental financial metric that measures the financial health of a company and its ability to generate and manage cash. In previous articles, we already introduced notions about this concept, but today we want to show you in detail how to analyze and use this key financial information to optimize business operations and ensure long-term stability and growth.

To fully understand this concept, we will also address a key concept: cash burn. We will explain why it is crucial to monitor an average of the last three months to avoid biases, such as the payment of the Personal Income Tax (IRPF), and how this control is essential to determine the company’s runway.

Once we have a solid understanding of the runway, we will look at different strategies to extend it, such as obtaining financing, reducing expenses, and seeking public assistance, among others. We will also highlight the importance of identifying the right time to start a financing round, usually at least 6 months before the runway depletion date.

In summary, this article will provide readers with a comprehensive understanding of cash flow, cash burn, and their pivotal role in a company’s financial management, helping them make informed and strategic decisions for the growth and survival of their startup.

What is cash flow?

Cash flow, or cash flow, is a key indicator that provides invaluable information about the financial health of a business or company. Although its literal translation is “cash flow” or “treasury flow,” it goes beyond a simple definition.

Knowing how to interpret a balance sheet or a profit and loss account is essential for any entrepreneur or executive today, even if they do not have financial training. However, this is not enough; it needs to be complemented with reality. And that reality translates into liquidity and treasury. In this sense, the need arises to know what cash flow is.

In essence, this concept shows us whether the company has the necessary liquidity to meet its financial obligations. It is a key measure to assess the viability and financial sustainability of a company, as it reveals the availability of cash and the ability to generate positive flows over time. Calculating and analyzing it properly allows for informed strategic decisions and ensures long-term financial stability.

Cash burn as a key within this process

The concept of cash burn is closely related to cash flow because both terms are intrinsically linked to financial management and the survival of a business. Here is an explanation of why these concepts are connected:

  • Liquidity Measurement: Cash flow refers to the amount of cash a company generates or consumes in a given period. It is essential to understand if a company has enough liquidity to cover its operating and financial expenses. Cash burn, on the other hand, specifically refers to the rate or speed at which a company consumes its cash. It is a metric that indicates how much time the company has before running out of cash.
  • Financial Planning: Both concepts are essential for short and long-term financial planning. Cash flow helps the company assess whether it is generating enough cash to maintain its operations and grow. Cash burn, on the other hand, allows the company to estimate how long it can operate before needing an additional cash injection.
  • Strategic Decision-Making: Cash burn is a valuable tool for making strategic decisions. When a company understands its cash burn, it can take proactive measures to extend its financial runway. This may involve seeking financing, reducing costs, or seeking government support. Effective cash burn management is essential to avoid financial crisis situations.
  • Financial Health Indicator: Both are key indicators of a company’s financial health. If the cash burn is constant and exceeds the cash flow generated by the company, it could indicate long-term financial problems. On the other hand, if a company generates positive cash flow but has high cash burn, it could also be spending its cash inefficiently.
calcular cash flow

The importance of cash flow for a company

Making a cash flow calculation gives us a clear view of the company’s liquidity. That is, it shows us whether the company has enough cash to cover its immediate financial obligations. Without adequate liquidity, a company may have difficulties paying its suppliers, employees, and even maintaining its daily operations. Therefore, cash flow acts as a financial thermometer that indicates whether the company can meet its payments and maintain its operations smoothly.

Additionally, it is a measure that assesses a company’s ability to generate profits. Through this indicator, it can be determined whether the business operations are generating enough cash flow to cover operating costs and, at the same time, generate profits. A positive cash flow indicates that the company is in a healthy position, while a negative one can be a warning sign of financial problems. Therefore, this concept provides crucial information for strategic decision-making and financial planning.

Another reason why cash flow is important is that it reflects the efficiency in managing a company’s financial resources. A company may have high revenues on paper, but if those revenues do not translate into a positive cash flow, it could be facing management or collection problems. Cash flow allows identifying possible areas for improvement in financial management and taking corrective measures to optimize the use of resources.

Advantages of calculating cash flow

1. A clear view of liquidity: Calculating it gives you a clear view of the cash availability in your company. It shows you if you have enough liquidity to cover your short-term financial obligations, such as paying your suppliers, meeting salary commitments, and facing operating expenses. Therefore, this information allows you to make more solid financial decisions and avoid cash flow problems that may affect the daily operation of your company.

2. Profitability Assessment: It also helps you assess your company’s profitability. It shows you if business operations are generating enough cash flow to cover operating costs and generate profits. Also, by calculating it, you can identify areas where you can improve efficiency and reduce unnecessary expenses. This allows for optimization in your operations.

3. Financial Planning: Calculating cash flow allows you to more effectively plan the financial future of your company. You can use the information it provides to create short and long-term financial projections, helping you set realistic goals and develop strategies to achieve them. Additionally, it allows you to identify periods when you are likely to face liquidity problems, giving you the opportunity to take preventive measures, such as seeking additional financing or adjusting your operations.

4. Attraction of investors and lenders: Solid and well-calculated cash flow is a powerful tool to attract investors and lenders. By showing solid financial management and the ability to generate positive cash flows, you increase investors’ confidence in your company, consequently increasing your chances of obtaining additional financing to boost growth.

cash flow inversores

How to calculate cash flow?

Below, we’ll walk you through the step-by-step process of calculating cash flow for startups:

1. Define the time period: Choose a timeframe for which you want to calculate the cash flow. It can be a month, a quarter, or a year.

2. Identify cash inflows (revenues): Start by identifying all revenue sources for your startup. This can include sales of products or services, investments, financing, grants, or other income sources. Record the total income amount for the specific period.

3. Estimate operational costs: Determine all operational expenses for your startup during the selected period. This can include production costs, marketing, rent, wages, utilities, supplies, and any other expense necessary for the operation of your business. Calculate the total sum of the operational costs.

4. Consider non-operational expenses: In addition to operational expenses, you should also consider non-operational expenses. These can include one-time or non-recurring payments, such as website development or equipment purchase. Record the total amount of non-operational expenses for the selected time period.

5. Calculate net cash flow: To determine net cash flow, subtract the operational costs and the non-operational expenses from the total revenues. The formula to calculate net cash flow is:
Net cash flow = Total revenues – Operational costs – Non-operational expenses

6. Analyze net cash flow: Once you’ve calculated the net cash flow, analyze the result. If the number is positive, it means that your startup has generated more cash than it spent during the selected time period, which is a good sign. If the number is negative, it indicates that your startup has spent more cash than it has generated, which may be a sign of financial issues.

It’s important to note that cash flow is just one measure of a startup’s financial health. You should also consider other factors, such as revenue growth, profitability, and efficient resource management.

It’s recommended to regularly track your cash flow to maintain proper financial control and make informed decisions in your startup.

At The Startup CFO, we understand the importance of cash flow and its impact on the growth and success of your startup. If, after reading this article, you still have questions about how to calculate it for your business, please don’t hesitate to get in touch with us. We’d be delighted to speak with you and assist in optimizing your revenues and expenses, providing you with strategic insights to maximize your cash flow and improve financial decision-making.

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Cash Flow. What is it and how to calculate it?

Cash flow is a fundamental financial metric that measures the financial health of a company and its ability to generate and manage cash. In previous articles, we already introduced notions about this concept, but today we want to show you in detail how to analyze and use this key financial information to optimize business operations and ensure long-term stability and growth.

To fully understand this concept, we will also address a key concept: cash burn. We will explain why it is crucial to monitor an average of the last three months to avoid biases, such as the payment of the Personal Income Tax (IRPF), and how this control is essential to determine the company's runway.

Once we have a solid understanding of the runway, we will look at different strategies to extend it, such as obtaining financing, reducing expenses, and seeking public assistance, among others. We will also highlight the importance of identifying the right time to start a financing round, usually at least 6 months before the runway depletion date.

In summary, this article will provide readers with a comprehensive understanding of cash flow, cash burn, and their pivotal role in a company's financial management, helping them make informed and strategic decisions for the growth and survival of their startup.

What is cash flow?

Cash flow, or cash flow, is a key indicator that provides invaluable information about the financial health of a business or company. Although its literal translation is "cash flow" or "treasury flow," it goes beyond a simple definition.

Knowing how to interpret a balance sheet or a profit and loss account is essential for any entrepreneur or executive today, even if they do not have financial training. However, this is not enough; it needs to be complemented with reality. And that reality translates into liquidity and treasury. In this sense, the need arises to know what cash flow is.

In essence, this concept shows us whether the company has the necessary liquidity to meet its financial obligations. It is a key measure to assess the viability and financial sustainability of a company, as it reveals the availability of cash and the ability to generate positive flows over time. Calculating and analyzing it properly allows for informed strategic decisions and ensures long-term financial stability.

Cash burn as a key within this process

The concept of cash burn is closely related to cash flow because both terms are intrinsically linked to financial management and the survival of a business. Here is an explanation of why these concepts are connected:

  • Liquidity Measurement: Cash flow refers to the amount of cash a company generates or consumes in a given period. It is essential to understand if a company has enough liquidity to cover its operating and financial expenses. Cash burn, on the other hand, specifically refers to the rate or speed at which a company consumes its cash. It is a metric that indicates how much time the company has before running out of cash.

  • Financial Planning: Both concepts are essential for short and long-term financial planning. Cash flow helps the company assess whether it is generating enough cash to maintain its operations and grow. Cash burn, on the other hand, allows the company to estimate how long it can operate before needing an additional cash injection.

  • Strategic Decision-Making: Cash burn is a valuable tool for making strategic decisions. When a company understands its cash burn, it can take proactive measures to extend its financial runway. This may involve seeking financing, reducing costs, or seeking government support. Effective cash burn management is essential to avoid financial crisis situations.

  • Financial Health Indicator: Both are key indicators of a company's financial health. If the cash burn is constant and exceeds the cash flow generated by the company, it could indicate long-term financial problems. On the other hand, if a company generates positive cash flow but has high cash burn, it could also be spending its cash inefficiently.

calcular cash flow

The importance of cash flow for a company

Making a cash flow calculation gives us a clear view of the company's liquidity. That is, it shows us whether the company has enough cash to cover its immediate financial obligations. Without adequate liquidity, a company may have difficulties paying its suppliers, employees, and even maintaining its daily operations. Therefore, cash flow acts as a financial thermometer that indicates whether the company can meet its payments and maintain its operations smoothly.

Additionally, it is a measure that assesses a company's ability to generate profits. Through this indicator, it can be determined whether the business operations are generating enough cash flow to cover operating costs and, at the same time, generate profits. A positive cash flow indicates that the company is in a healthy position, while a negative one can be a warning sign of financial problems. Therefore, this concept provides crucial information for strategic decision-making and financial planning.

Another reason why cash flow is important is that it reflects the efficiency in managing a company's financial resources. A company may have high revenues on paper, but if those revenues do not translate into a positive cash flow, it could be facing management or collection problems. Cash flow allows identifying possible areas for improvement in financial management and taking corrective measures to optimize the use of resources.

Advantages of calculating cash flow

1. A clear view of liquidity: Calculating it gives you a clear view of the cash availability in your company. It shows you if you have enough liquidity to cover your short-term financial obligations, such as paying your suppliers, meeting salary commitments, and facing operating expenses. Therefore, this information allows you to make more solid financial decisions and avoid cash flow problems that may affect the daily operation of your company.

2. Profitability Assessment: It also helps you assess your company's profitability. It shows you if business operations are generating enough cash flow to cover operating costs and generate profits. Also, by calculating it, you can identify areas where you can improve efficiency and reduce unnecessary expenses. This allows for optimization in your operations.

3. Financial Planning: Calculating cash flow allows you to more effectively plan the financial future of your company. You can use the information it provides to create short and long-term financial projections, helping you set realistic goals and develop strategies to achieve them. Additionally, it allows you to identify periods when you are likely to face liquidity problems, giving you the opportunity to take preventive measures, such as seeking additional financing or adjusting your operations.

4. Attraction of investors and lenders: Solid and well-calculated cash flow is a powerful tool to attract investors and lenders. By showing solid financial management and the ability to generate positive cash flows, you increase investors' confidence in your company, consequently increasing your chances of obtaining additional financing to boost growth.

cash flow inversores

How to calculate cash flow?

Below, we'll walk you through the step-by-step process of calculating cash flow for startups:

1. Define the time period: Choose a timeframe for which you want to calculate the cash flow. It can be a month, a quarter, or a year.

2. Identify cash inflows (revenues): Start by identifying all revenue sources for your startup. This can include sales of products or services, investments, financing, grants, or other income sources. Record the total income amount for the specific period.

3. Estimate operational costs: Determine all operational expenses for your startup during the selected period. This can include production costs, marketing, rent, wages, utilities, supplies, and any other expense necessary for the operation of your business. Calculate the total sum of the operational costs.

4. Consider non-operational expenses: In addition to operational expenses, you should also consider non-operational expenses. These can include one-time or non-recurring payments, such as website development or equipment purchase. Record the total amount of non-operational expenses for the selected time period.

5. Calculate net cash flow: To determine net cash flow, subtract the operational costs and the non-operational expenses from the total revenues. The formula to calculate net cash flow is:
Net cash flow = Total revenues - Operational costs - Non-operational expenses

6. Analyze net cash flow: Once you've calculated the net cash flow, analyze the result. If the number is positive, it means that your startup has generated more cash than it spent during the selected time period, which is a good sign. If the number is negative, it indicates that your startup has spent more cash than it has generated, which may be a sign of financial issues.

It's important to note that cash flow is just one measure of a startup's financial health. You should also consider other factors, such as revenue growth, profitability, and efficient resource management.

It's recommended to regularly track your cash flow to maintain proper financial control and make informed decisions in your startup.

At The Startup CFO, we understand the importance of cash flow and its impact on the growth and success of your startup. If, after reading this article, you still have questions about how to calculate it for your business, please don't hesitate to get in touch with us. We'd be delighted to speak with you and assist in optimizing your revenues and expenses, providing you with strategic insights to maximize your cash flow and improve financial decision-making.