A cash flow statement for a startup business has distinct characteristics that set it apart from cash flow statements of businesses at other stages of development. These differences stem from the unique challenges and circumstances that startups face.
Generally, there is a higher level of risk and uncertainty in the operations of a startup and this risk is often reflected in the cash flow statement, both in terms of operational risks and the risk of running out of cash.
Here are some other aspects that make a startup’s cash flow statement different from others:
Startups often focus on their burn rate, which is the rate at which they consume their cash reserves before achieving profitability. This metric is crucial for startups and is often scrutinised in their cash flow statements.
Unlike established businesses, startups typically have limited historical financial data which makes forecasting cash flows more speculative and based on assumptions about market conditions, customer acquisition, and growth rates. Startups can also experience more variability and unpredictability in their revenue streams, especially if they are still in the process of market validation and finding a product-market fit.
READ: Financial Forecast Template for Free
Cash flow statements for startups often reflect a heavy reliance on external funding, such as venture capital, angel investors, or crowdfunding. This is in contrast to more established businesses that might rely more on revenue-generated cash flow. Startups may also have higher cash outflows in their early stages due to initial setup costs, product development, market research, and building customer base which are also typically reflected in the cash flow statements.
The nature of operational expenditures in startups can be different. They might include costs related to technology development, market testing, or high marketing expenses to establish brand presence.
The cash flow statement of a startup is often used to gauge future viability rather than just current financial health so it serves as a tool to project when the startup will become cash flow positive and what strategic moves are needed to reach that point. The cash flow statement is a critical document for investors, who may use it to assess the feasibility of the business model, the efficiency of cash use, and the potential for future growth and profitability.
Startups often have to be more flexible and adaptable in their operations, which can be reflected in their cash flow statements. This might include rapid shifts in strategy, which can lead to significant changes in cash flow patterns.
Before you consider pitching your business to investors, you must first ensure that your business is indeed ready for investment – that it is ‘investment ready’.
Investment readiness refers to the state in which a startup or business has prepared itself to be an attractive prospect for investors. Being ‘investment ready’ means a founder has all the elements in place that investors look for when considering whether to commit funds to a business – including a credible projection of their cash flow statement.
There are investor readiness agencies for startups that can help businesses get ready for investment and develop their business case. We at Robot Mascot are one such company.
If you are seeking investment for your business and need help conducting market analysis and market research why not get in touch?