Cash Flow Consulting for Venture-Backed Startups

All startups should prioritize their long-term viability, and positive cash flow is a big part of ensuring that your startup will survive. Cash flow is the net amount of actual cash and cash equivalents that move into and out of your startup, thereby demonstrating its liquidity and its ability to meet day-to-day operational obligations. If your startup doesn’t have adequate cash flow, it’s not going to be able to pay rent, make payroll or make good on its other expenses, which can spell doom.

A cash flow consultant can help your startup better manage cash inflows and outflows to avoid shortfalls and ensure there’s enough liquidity to cover day-to-day expenses, while also fueling growth. At Graphite Financial, we specialize in partnering with startups to help them grow and prosper, and cash flow consulting is among the many services that we offer. Read on to learn more about the value of cash flow consulting, or contact Graphite today to learn more.

Strategic Cash Flow Management for Startup Success

Cash flow consulting isn’t traditional bookkeeping. Standard bookkeeping involves consistent recording and keeping accurate financial records, while a cash flow consultant focuses on your startup’s financial future to manage, predict and optimize its overall cash position. Cash flow analysts perform cash flow analysis and monitoring, cash flow forecasting, and implement various tools and strategies to guide startups in optimizing working capital and managing risk. Startups can also benefit from maintaining a dedicated savings account to ensure liquidity for day-to-day operations and unexpected expenses.

Good cash flow management can be especially important when preparing for fundraising rounds. It can demonstrate your startup’s financial health to investors and make your startup more attractive for investment. Good cash management can also help ensure that your startup has a safety net to help provide a buffer from unforeseen challenges that could arise, which further helps enhance its appeal.

Critical Cash Flow Challenges for Scaling Startups

Startups aren’t without their share of cash flow challenges, especially as it pertains to managing high-growth expenses. There are inventory and marketing costs, supplier costs and obligations, inconsistent revenue, an increase in fixed costs, market volatility and other external factors that startups need to be mindful of. Strong discipline in managing cash flow becomes essential here, as even profitable startups can quickly run into liquidity issues without careful oversight. Monitoring accounts payable closely is key to ensuring timely payments and avoiding unexpected cash shortfalls.

Venture-backed startups also need to be mindful of growing and scaling sustainably, balancing investments with cash preservation strategies. Cash flow gaps are another challenge, especially for early-stage startups with tight budgets. These gaps often occur as part of a disconnect between when revenue is recognized and when money is received, making your startup profitable on paper, while it is actually struggling due to cash flow shortages.

Optimizing Burn Rate While Accelerating Growth

How can your startup balance capital efficiency with aggressive growth targets? It needs to strike the right balance between optimizing burn rate and driving growth. There are a number of metrics to help assess this. For instance, SaaS startups should consider abiding by the Rule of 40, which states that your startup’s combined revenue growth rate and profit margin should be equal to or exceed 40 percent. Other key financial metrics include CAC, LTV and the LTV:CAC ratio. Startups can also use a discounted cash flow method to project the impact of different growth strategies on future cash availability, helping to optimize burn rate while pursuing expansion.

Some techniques to extend your startup’s cash runway without sacrificing growth include:

• Cutting non-essential costs or negotiating better terms with suppliers and partners.
• Optimizing sales and marketing channels to deliver a higher return on investment.
• Prioritizing financial forecasting to track future cash flows and expenses, and adjusting as necessary.

Fundraising Timeline and Cash Bridge Analysis

Good cash flow consulting can be especially valuable during fundraising periods — and not just for proving to investors the financial viability of your startup. You can also help connect cash flow planning to your specific fundraising strategies. Your cash flow projections can help predict income, estimate expenses and map out the timing of your fundraising rounds. Strong cash management practices can also help build confidence with venture capital firms, demonstrating your ability to balance future growth with sustainability.

There may also be times when you find that you need funding between fundraising rounds to extend your cash runway or finance key milestones. You may consider several bridge financing options or other funding strategies to ensure your startup stays afloat. These can include:

• Convertible notes: These are debt instruments that convert into equity at a future financing round. They usually come with a discount to incentivize investors.
• Simple Agreements for Future Equity (SAFEs): These are similar to convertible notes, but usually don’t have an interest rate or a maturity rate. SAFEs convert into equity when they hit a future funding event.
• Short-term debt: You may also consider taking out a traditional loan for a specific financial need. These must be repaid with interest or refinanced with working capital at a later date.

Industry-Specific Cash Flow Solutions

Your startup’s cash flow needs and solutions will largely depend on its industry of operation. For instance, SaaS startups will have different needs than eComm startups — and it’s important to know the unique dynamics based on industry and optimization strategies. Here’s a closer look at some of these strategies based on industry:

• SaaS: SaaS startups usually have predictable recurring revenue, but are challenged by high customer acquisition costs. Strategies for accelerating cash flow and reducing outflow include offering discounted annual contracts with upfront payment, focusing on customer retention to reduce churn rate, and paying close attention to key metrics such as MRR, ARR and CAC to fully understand your startup’s cash positioning and forecasting future cash needs accordingly.
• eComm: eComm startups are largely challenged by managing inventory, which can be costly. Some strategies for improving cash flow include optimizing inventory turnover and inventory management, negotiating better terms with suppliers and partners, optimizing payment processing and proper cash flow forecasting.
• HealthTech: Healthtech companies must navigate complicated regulations and billing requirements, which can potentially impact their overall financial health. Strategies to optimize cash flow include automating billing and claims management, improving the overall billing and collections process, and implementing a more robust revenue cycle management process.

Advanced Cash Flow Analytics and Forecasting

Prioritizing cash flow analytics and forecasting can help set the table for positive long-term cash flow. Implementing the right programs to help monitor cash flow in real-time can help with transparency, and other predictive analysis and scenario planning tools can help your startup plan better for the future. These KPI dashboards can also help with investor-ready reporting during fundraising rounds, especially when paired with a strong financial model that clearly demonstrates assumptions, projections, and growth potential.

These more advanced methods can help improve accuracy, improve decision-making and increase overall efficiency. Consider incorporating a broad range of data sources when determining cash flow, such as operational metrics, market indicators and economic data alongside traditional financial data. Other best practices include leveraging AI and machine learning to assess your historical and real-time data to help identify patterns and trends that can facilitate better predictions and detect irregularities.

Scenario Planning and Stress Testing

Scenario planning and stress testing involve modeling different situations to identify risk, check assumptions and help develop contingency plans should the unexpected occur. Some best practices for scenario planning and stress testing your cash flow models include:

• Creating multiple scenarios based on best-case, worst-case and most likely situations.
• Identifying the key internal and external factors that influence cash flow.
• Gathering historical data and modeling accordingly to help influence your forecasts.
• Regularly model your cash flow forecasts and financial plan and adjust as necessary.

Scenario planning and stress testing can help your startup with monitoring risk management, improving overall decision-making, identifying weaknesses and improving stakeholder confidence.

Graphite Financial’s Cash Flow Consulting Approach

Graphite strives to be more than just a valued partner to your startup, but an extension of it. Our fractional CFO offering also includes strategic cash management services to help ensure that your startup’s cash position is optimized. Prioritizing your cash flow management and integrating this as part of Graphite’s full-service accounting offering helps your startup stay proactive and avoid many of the financial pitfalls that have the potential to derail a startup. This strategic guidance also helps founders position themselves more effectively when engaging with investors, from private equity funds to venture capital firms, by presenting a clear financial narrative supported by disciplined cash management.

Transform Your Startup’s Cash Management Strategy

Cash is king in any business, but it’s especially important for a startup that’s still looking to gain market share and establish itself in its industry. That’s why it’s so important to prioritize cash flow and ensure that it’s properly managed. For more information on Graphite’s fractional CFO and strategic cash flow management services, contact us today to schedule a consultation.

Frequently Asked Questions

What exactly does a cash flow consultant do for startups?

Cash flow consultants have wide-ranging roles. However, at the basic core level, they work to help startups manage their liquidity so they don’t run out of cash. They assist startups by building robust forecasting models, implementing cash management strategies and guiding a startup based on its specific goals. Good cash flow consultants track runway and burn rate, identify potential shortfalls and conduct robust scenario planning as they manage startup liquidity. They may also help with cost control and expense management, and strategic financial guidance.

How is cash flow consulting different from regular bookkeeping services?

There are various key differences between cash flow consulting and regular bookkeeping services. At the most basic level, regular bookkeeping involves consistent recording and keeping accurate financial records. Conversely, a cash flow consultant focuses on your startup’s financial future to manage, predict and optimize its cash position.

A bookkeeper’s daily tasks involve paying bills, sending out invoices, categorizing expenses and reconciling bank and financial statements. A cash flow consultant’s daily tasks include analyzing cash flow cycles, forecasting future cash flow, and developing strategies to optimize cash inflows and outflows.

When should a startup engage a cash flow consultant?

There are several notable situations where it may make sense to engage a cash flow consultant. These include when your startup’s financial complexity grows, during periods of rapid growth or for assistance in preparing for a fundraising event. There’s really never a bad time to begin working with a cash flow consultant, but the aforementioned situations make the most sense.

How does cash flow consulting help with fundraising preparation?

Cash flow consultants also play a key role in helping your startup prepare for fundraising rounds. How? By organizing a clear financial narrative that can help instill confidence in potential investors. Some of the key duties of a cash flow consultant involve creating accurate financial projections, identifying and minimizing risk, optimizing resources and building cash reserves. This can all help enhance your credibility with investors and also help streamline the due diligence process.

What cash flow metrics do investors care about most?

Investors assess various metrics during the due diligence process, but they prioritize certain metrics above others. These include free cash flow, operating cash flow, cash flow to debt, cash flow margin and cash conversion cycle. These metrics can all help investors better assess a startup’s financial health, understand its growth potential, identify its operational efficiency and spot potential red flags, aligning with overall investor expectations for transparency and financial rigor.

How often should startups review their cash flow forecasts?

It’s best practice for startups to review their cash flow forecasts at least monthly. However, early-stage startups or startups in periods of rapid growth should consider updating them even more regularly than this, potentially as often as weekly. Beyond the state of your startup, consider assessing your startup’s burn rate and overall financial stability to determine how frequently you should update the cash flow forecast.

Can cash flow consulting help extend our runway without cutting growth?

Under the right circumstances, yes. In fact, in some cases, cash flow forecasting can even fuel growth. Keep in mind that cash flow consultants aren’t often looking to cut costs across the board within your startup, but identify ways to more strategically optimize cash flow to free up more capital to grow and invest back into the business. A good cash flow consultant will provide the financial visibility your leaders need to see and provide actionable insight on how to optimize inflows and outflows.

What’s the difference between cash flow and profit for startups?

Cash flow and profit are both very different things, and it’s important to understand them. Profit is the sum of money that remains after all of your startup’s expenses are deducted from its revenue. Conversely, cash flow is the new amount of actual cash and cash equivalents that move into and out of your startup.

Both are important to your startup’s survival and its strategic decision-making. For instance, a lack of cash flow can spell doom for your startup —even if it’s profitable. That’s because if you don’t have cash flow, you may not be able to ensure financial stability or even pay your bills. Investors also assess profit to determine its long-term potential and cash flow to ensure short-term operations.