For entrepreneurs, the importance of cash flow cannot be overstated. Simply put, no cash, no business. To put it another way, consider the phrases, “Burn Rates, Fume Dates, and Wallpaper,” which refers, respectively to how fast a company is using cash when it is perilously low on cash, and what stock certificates are worth when it no longer has cash.

With the above as fair warning, it is perhaps a good time to re-examine a few concepts about accounting and finance. The first is that accountants distinguish revenue from expenses, with the difference being a net gain or loss, the latter indicated by parentheses. The second is that entrepreneurial finance concerns itself with “free cash flow,” which is the difference between total cash income and the total of all cash outlays required. A more complete definition for “free cash flow” is net income after taxes, plus depreciation, minus required investments in plant, equipment, and working capital to successfully run the business.

In fast-growing entrepreneurial companies, sales growth is a significant factor affecting cash flow. As sales continue to grow, an entrepreneur usually needs to increase fixed assets (plant and equipment) and working capital. Remember growth in assets comes from three places: retained earnings increased debt or the sale of more of your precious stock (equity).

As you begin work on the financial section of your Business Plan, pay particular attention to cash flow. Don’t run out of cash! While raising enough money upfront will help solve under-capitalization failure, good forecasting (especially sales) and tight expense control (as in initial low salaries!) will conserve your precious cash and extend burn rates significantly.

Other hints to preserve cash include the following:

  • Raise enough start-up capital!
  • Shift Fixed Costs to Variable!
  • Keep inventory and supplies at an absolute minimum!
  • Defray and delay expenses!
  • Lease or borrow instead of buy!
  • Act as if it’s your own money – It is!

As we have learned, you don’t have to own resources to control them. Be creative. Virtual corporations are in vogue because of this insightful definition of entrepreneurship: “A way of managing that involves the creation of an opportunity without regard to the resources currently controlled.”

The cash flow-production cycle involves a close interplay between company operations and finances. This simple movement of cash to inventory, to accounts receivable, and back to cash is the firm’s operating, or working capital, cycle. Another ongoing activity is an investment. Over a period of time, the company’s fixed assets are consumed, or worn out, in the creation of products.

As you become more confident with the numbers game you will begin to grasp the importance of cash flow and why it is literally the lifeblood of your new company. Remember: “Nothing happens till somebody sells something and collects the cash or accounts receivable!”


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