Cash Flow Planning Essentials for High-Growth Startups

What’s the No. 1 reason why startups fail? Cash flow problems.

It’s simple enough: If your startup runs out of money, it won’t be able to operate. Unfortunately, cash flow problems are also fairly common for startups, but not necessarily for the reasons that you might think. While cash flow issues can be a symptom of poor product-market fit, marketing and planning, many cash flow issues stem from ineffective financial management.

Many factors impact cash flow, and startups shouldn’t downplay the importance of proper cash flow planning and strategic financial management. Such services are far more than just basic budgeting, but can help facilitate fundraising success, optimize cash flow runways and put your startup on a path of sustainable growth.

What is Cash Flow Planning?

In the context of a startup, cash flow planning involves forecasting future cash inflows and outflows to ensure that operations are solvent. Cash flow planning helps ensure that your startup has enough money to cover expenses and meet all financial obligations. There are various steps involved in cash flow planning, including:

• Forecasting: This involves creating projections of cash inflows and outflows over a specific period for your startup. For instance, forecasting can be done quarterly or monthly.
• Monitoring: Monitoring involves tracking data to help influence forecasting. Data can help your startup identify any key changes and adjust projections accordingly.
• Managing: Cash flow also has to be properly managed so your startup can ensure it’s able to pay the bills, make payroll, and cover other key expenses. A good cash flow strategy can also help facilitate startup growth.

Cash flow planning for startups is quite different than planning for more established entities. For instance, startups should strive to be proactive with their forecasting and rely on known factors and market trends since they have limited historical data. Startups also need to be careful with how they manage expenses and limit unnecessary spending so as not to strain cash runway. Other key factors for startups and cash flow planning include minimizing the time it takes to convert investments into cash, securing appropriate funding when necessary, and regular monitoring and analysis of cash flow metrics, like burn rate and cash runway.

It’s also important to make the distinction between cash flow planning and budgeting for growth-stage startups. Budgeting involves creating a comprehensive financial plan over a period of time, while cash flow planning is a prediction of money moving in and out of your startup. While both are important for growth-stage startups, they’re not the same.

Why Cash Flow Planning is Critical for Startup Success

It’s estimated that up to 40 percent of all startups fail due to cash flow issues, a statistic that underscores the importance of proper cash flow management. This is especially true when you consider some of the challenges unique to startups that impact positive cash flow, such as irregular revenue, high burn rates and a dependency on funding, and the complexities of managing debt financing alongside equity. Part of cash flow planning is preparing for fundraising, building investor confidence and optimizing operational efficiency. At the same time, it’s important for startups to avoid down rounds, maintain a cash runway and make efforts to prepare for any anticipated market volatility to mitigate risk.

The Cost of Poor Cash Flow Planning for Startups

Poor cash flow planning can be devastating to your startup and your employees, eroding your operations from the inside out. Some of the most significant consequences of improper planning include missing payroll and not being able to pay your people, having to rely on emergency fundraising to ensure the solvency of your startup and down rounds from poor valuation.

This can thereby result in stagnant growth, a loss of talent, an erosion of investor confidence and significant difficulties with future fundraising rounds. One of the most immediate warning signs is negative cash flow, which means your startup is spending more money than it’s bringing in. If left unaddressed, it can quickly lead to insolvency.

The Startup Cash Flow Planning Framework

Ready to create a framework for cash flow planning? A multi-step approach that integrates fundraising cycles and growth planning can set your startup up for success. Here’s a closer look at the steps to consider when creating your cash flow planning framework:

Step 1 – Startup Revenue Forecasting & Cash Inflow Projection

How you forecast revenue for your startup depends on what stage it’s in. For instance, if you’re an early-stage startup, you’re going to forecast revenue differently than when you’re in growth mode. Early-stage startups have limited data and higher levels of uncertainty than more established startups, so taking either a top-down or bottom-up approach, while considering different scenarios, is ideal. Conversely, growth stage startups should be able to rely more on data and take more of a bottom-up approach to their forecasting, while tracking key metrics that matter.

Startups must also account for customer concentration risk and churn in their forecasting while modeling various scenarios. Finally, non-operating cash inflows, such as those from funding, grants and tax credits, should be considered.

Step 2 – Burn Rate Analysis & Cash Outflow Management

Systematically analyzing and optimizing cash flow is imperative for startups serious about their success. Categorize your startup’s expenses between fixed and variable, critical and discretionary. Make sure you also have a thorough understanding of the true burn rate and reported expenses, and know the timing of when expenses actually hit bank accounts.

Be especially mindful of your operating expenses and capital expenditures, which include the day-to-day costs necessary to keep your startup running—such as salaries, rent, software subscriptions, and utilities. Managing these effectively is key to improving your burn rate and extending your cash runway.

The 13-Week Cash Flow Forecast for Startups

A 13-week cash flow is a short-term financial planning tool specifically helpful for startups to manage inflows and outflows over the course of one fiscal quarter. Thirteen weeks is considered ideal for monitoring liquidity, anticipating cash shortages and making informed operational decisions. A 13-week flow forecast can help identify cash shortfalls and encourage more informed decision-making and better liquidity management. Furthermore, this increased financial stability from a 13-week model can also make your startup more attractive to lenders and investors.

In contrast to a cash flow statement, which is historical and backward-looking, the 13-week cash flow forecast is forward-looking and helps predict future liquidity needs in real time. Both are important tools, but they serve different purposes in financial planning.

Building Your 13-Week Rolling Cash Flow Model

Building a 13-week rolling cash flow model consists of including a number of variables, such as:

• Historical data
• Projected data
• Inflows and outflows

Once you determine an objective and gather this data, you’ll need to structure the model and categorize variables such as beginning cash balance, cash receipts, cash disbursements, net cash flow and ending cash balance. Be sure to scenario plan within the 13-week framework and conduct variance analysis to improve the forecast over time.

Cash Flow Planning by Startup Industry Vertical

Cash flow planning won’t just look different based on the current stage your startup is in, but based on the industry it’s in. For instance:

• SaaS startups need to manage subscription revenue timing and also take CAC payback and churn impact into consideration.
• eComm startups need to consider inventory management, seasonal fluctuations and payment timing.
• HeathTech startups need to factor in variables such as regulatory compliance costs and long sales cycles.

Cash Flow Planning Across Startup Funding Stages

Cash flow planning for a more established startup will be very different from that for an early-stage, pre-seed startup.

For instance, pre-seed startups are still in the bootstrap stage, where survival is their main focus. Noting this, forecasts don’t tend to be complex. Seed-stage startups focus more on growth planning and that initial wave of institutional funding, while startups nearing Series A require more sophisticated modeling and need to consider investor reporting requirements, especially when venture capital becomes a primary funding source.

Using Cash Flow Plans for Fundraising Success

Cash flow planning also supports startup fundraising by demonstrating your startup’s financial health, showing potential and scalability, and building investor confidence. Investors are on the lookout for data-driven assumptions in cash flow projections. They also want to see evidence of a clear understanding of the business model, cash flow management, and financial reporting, as well as risk assessment and scenario planning.

Many startups are hurt by a lack of preparation and research, and various strategic missteps (i.e, overvaluing the startup), which can impact their relationships with investors and sink fundraising deals.

Common Cash Flow Planning Mistakes Startups Make

Successful cash flow planning holds the key to so much for your startup, from fundraising to projecting future growth and strategic planning. Yet, many startups are prone to mistakes that can derail successful cash flow planning efforts. These mistakes include:

• Over-optimistic revenue projections and timing
• Underestimating cash outflow timing and amounts
• Ignoring seasonal variations and market cycles
• Failing to plan for growth-related cash needs

Cash Flow Planning Tools & Technology for Startups

There are various cash flow planning tools available to help startups. Many of these integrate with other accounting software and systems and include automation capabilities to streamline workflows and save time. Some of the leading cash flow forecasting software programs and other technologies include Savant, Mosaic, Drivetrain, Pulse and Prohix One.

While tools like a profit and loss statement help track revenue and expenses over a set period, they don’t always show the timing of cash movements. This is why integrating dedicated cash flow tools is essential—they provide a clearer picture of liquidity and help startups anticipate and prepare for shortfalls.

Advanced Cash Flow Optimization Strategies

The more your startup matures, the more advanced its cash flow optimization should be. Some more advanced cash flow optimization techniques include:

• Improving working capital management by improving receivables and the invoicing process, and negotiating longer payment terms with suppliers and partners.
• Improving cash conversion cycles by focusing more on inventory management, accounts receivable and accounts payable.
• More proactively handling your startup’s financial resources to manage cash more smartly.

Scenario Planning & Stress Testing Your Cash Flow

To best prepare for economic and business scenarios, consider building scenario models to gauge the best-case, worst-case and the most likely situation. It’s also important to stress test any assumptions with key variables so you have a more comprehensive idea of all possible outcomes and can contingency plan and respond in the event that conditions sour. Contingency planning and stress testing are also something that’s viewed favorably by investors, as it shows a high level of understanding and preparation.

When to Get Help with Cash Flow Planning

Do you need help managing cash flow planning for your startup? If your startup is experiencing rapid growth, your finances are becoming more complicated or if you just want to free up time for leadership to work on non-financial tasks and spur growth, then it could be time to look at working with a qualified financial partner for your cash flow planning. A fractional CFO can help offer comprehensive cash flow and financial planning and can grow with your startup as it evolves to create a long-term, high-value partnership.

Ready to Master Your Startup’s Cash Flow?

If you’re ready to take cash flow planning to the next level, contact Graphite Financial today. As an expert financial services firm that specializes in working with startups like yours, we understand cash flow complexities and will work to integrate your cash flow planning so it aligns with a broader financial strategy. Contact us today to learn more about the importance of cash flow planning and how Graphite can help take your startup’s financial acumen to new heights.

Frequently Asked Questions

What is the difference between cash flow planning and budgeting for startups?

Budgeting involves creating a comprehensive financial plan over a period of time, while cash flow planning is a prediction of money moving in and out of your startup.

How often should a startup update its cash flow forecast?

A startup should consider updating its cash flow forecast at least monthly. For many startups, however, it’s better to update them even more frequently.

What’s included in a 13-week cash flow plan for startups?

A 13-week cash flow plan includes inflows and outflows on a weekly basis for up to 13 weeks, or about one fiscal quarter. Other variables that are included in a typical 13-week cash flow plan include a cash balance sheet, key data sources (i.e., bank statements, income statements, financial statements, etc.), assumptions based on sales growth, payment terms, etc., and various scenario planning.

How do I account for irregular revenue in my cash flow plan?

Prioritize a budget based on your lowest expected income and then build a cushion from there where you allocate savings from high-revenue months. Other strategies include tracking expenses and smarter spending, responsible management of debt and credit, and planning for fluctuations.

When should a startup hire help for cash flow planning?

Consider hiring a financial expert to help with cash flow planning when your startup is experiencing rapid growth, has to manage complex finances or needs an expert other than its leaders to handle increasingly complicated finances.

How does cash flow planning change as a startup raises funding?

Cash flow planning shifts from survival to strategic growth, investing cash flow, and managing investments as a startup raises funds and grows.

What cash flow metrics do investors look for during due diligence?

Some of the top cash flow metrics investors assess include operating cash flow, free cash flow, cash conversion cycle, quality of earnings, net debt and net working capital, among others.

How do I create a cash flow plan for a pre-revenue startup?

Start by determining the timeframe you want for your plan. From there, you’ll identify your projected inflows and outflows to estimate your cash flow and then work to analyze and refine your projections over time as your startup matures.