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Why Should a Startup Track Its Cash Flow?

Even if you are a startup, you shouldn’t delay creating a cash flow statement. The sooner you can get ahold of your business’s finances, the better. This is important advice for founders to heed.

When you first launch your startup, your cash flow statement will reflect any initial cash contributions from the founders in addition to any small business loans — recording these as inflows of cash. Additionally, if you have purchased computers, printers, or office furniture when setting up your initial office, you’ll include these expenses as outflows of cash.

Remember, though, your cash flow statement is one of three critical financial statements, with the other two being the balance sheet and the income statement. As a new business, it would be prudent to hire a qualified accountant to help you navigate through these financial reports. It really is advisable to not try to create these yourself unless you have a solid financial background. Mistakes can be costly.

“Cash is king.” Although this quote’s origins are unknown, many famous capitalists have used this phrase, including the iconic Jack Welch and Dave Ramsey. For any business, including startups, cash flow management is critical to a company’s success.

By understanding your startup’s cash inflow and outflow, you can better grow your business while avoiding financial hardships or collapse. The better you know your cash flow, the more precisely you can predict your future, such as expanding into additional markets or hiring new employees. Further, by having a firm grasp on your cash, you can better prepare for seasonal ups and downs, positioning yourself for any bumps in the road.

Examples of Startup Cash Flow Templates

Below is an example of a cash flow statement template, showing operating cash flow, investing cash flow, financing cash flow, and the closing cash balance over a set annual period.

How the Cash Flow Statement Links to the Balance Sheet and Income Statement

Here’s an example showing the relationship of these three crucial financial reports: the income statement, the balance sheet, and the cash flow statement.

Benefits

We already know that you need to track your cash, especially as a startup. Behind lack of market need, most startups fail because they ran out of cash . Therefore, tracking your money can contribute to the success of your business.

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

Limitations

Like anything, there are pros and cons. Here are some limitations associated with preparing a cash flow statement https://paydayloanstennessee.com/cities/lexington/ for your startup.

  • A cash flow statement does not present your actual net income since it does not consider non-cash items. To determine this exact amount, you’ll need to examine both your cash flow and income statement.
  • A cash flow statement is not a replacement for your income statement. Each brings different financial aspects of your startup to the table, both of which are important to your startup’s overall financial health.
  • A cash flow statement does not predict future cash flows, as a cash flow statement only tracks financial information during a specific period.
  • It takes time, money, and expertise to prepare a solid cash flow statement.

Even with these limitations, the benefits of preparing a cash flow statement for your startup far exceed any drawbacks or limitations. A cash flow statement is a financial tool that you should regularly use in your startup, helping you run your business efficiently, cost-effectively, and profitably.

Learn more with us

  • How to prepare an income statement

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