Your company's daily cash flows are a key metric to understand how your core business is performing. While positive cash flow is often synonymous with a healthy business, its value often depends on the maturity of your business.
Most startups (series B seed) grow at the expense of profitability (or growth at any cost). However, once they reach Series C, showing positive cash flow becomes very important. But in times of market turmoil, businesses of all stages and sizes need to take a closer look at their line items and delve deeper than ever into financial efficiency.
While a no-cost growth strategy can be effective in certain situations, it's even more important to know exactly what you're trading for profitability. Small adjustments in the way money flows through your business can have a profound impact on your capital efficiency.
operation of an agentCashflow-Analyseallows you to understand your working capital and proactively resolve issues. You need to know your operating cash flow to see what's available for investment and calculate yoursFree Cash Flow, among other important personalities.
By paying close attention to your cash flow from operations, you can lay the strongest foundation for your company's financial narrative, which can make or break the guarantee for the next round of funding.
What counts as cash flow from operating activities?
Cash flow from operating activities only considers the coredeposit and withdrawdue to business activities. You don't book money from investing activities or from creditors (the other two parts of your cash flow statement).
- Cash inflows from operations include any new product or subscription sales or additional sales, outstanding accounts receivable, or interest paid to the company.
- Cash outflows from operating activities take into account all expenses to maintain business operations, such as B. payslips and the likerevenue costs(advertising costs etc.). But it also includes taxes paid, liabilities, and rent.
Example cash flow from operating activities
Understanding your cash flow is key to strategic planning. Without it, you don't know your consumption or the length of your route. And you can't plan anything in the long term. At least not exactly. But between data transfers and manual analysis, cash flow verification takes a backseat.
that had happenedsource graphic, a San Francisco-based startup on a mission to democratize code. There, cash flow reports and analysis had to wait until the end of each quarter. This meant they could potentially go 12 weeks without the prospect of costly (or worse) cash flow setbacks. That wait was necessary: The rigorous demands of collecting and consolidating data meant teams spent days, if not weeks, preparing financial reports.
When Sourcegraph raised $50 million of its Series C, the finance team was ready for a more efficient process. They wanted better ways to understand spending trends earlier so they could predict how different growth scenarios would affect the company's bottom line.
“We had a system in place, but that system didn't match our ambitions. This meant everything related to financial strategy had to be done manually. We knew we needed a better way to analyze the numbers and provide insightful near-term guidance for our future planning."
Tommy O’DonnellFP&A-Manager bei Sourcegraph
Sourcegraph was able to consolidate revenue metrics, including cash flow, into an accessible dashboard tailored to the finance team's needs at the time. Mosaic's integration with Xero and Salesforce allows them to track changes in cash flow in real time. From there, critical SaaS metrics likeannual recurring revenue(ARR), ARR shifts andburn liquidare calculated automatically. And with automated cash flow reporting, Souregraph's finance team saved hundreds of hours of manual work and was able to delve into proactive collaboration with trading partners to quickly understand cash changes and cash inflows and outflows.
How to calculate cash flow from operations
There are two ways to calculate cash flow from operations: the direct method and the indirect method. The direct method calculation tracks cash as it enters and leaves the company. The result is a fairly accurate picture of your daily cash position.
Calculating with the indirect method provides granular financial detail and nuance that is lost with the direct method. You start with yoursliquid resultand work backwards, taking into account both cash and material costs.
Both methods can help you determine if you have positive or negative operating cash flow. However, note that the indirect method is preferred as it provides the granular details that VCs want to know in funding rounds.
With the direct cash flow method or the income statement method, you can keep track of every cash transaction. Inputs (receipts) and outputs (expenses) are balanced to determine a positive or negative cash flow.
Operating cash flow (direct method) = total income - operating expenses
The main advantages of the direct method are that you can know your current status of cash and see it moving through your cash flow systems.
While the calculation is easy, tracking individual cash transactions is time consuming. A sale can be noted on Monday, but the transaction is not posted until Friday. The direct method requires someone to track the transaction from promise to payment. Keeping all income and expenses in one spreadsheet is not the most efficient way to use valuable labor resources. For this reason, many startups rely on the indirect method to understand net cash flow.
The indirect cash flow accounting method uses the accrual accounting method. Tracks cash transactions as they happen, not as they happen. So, in the above scenario, the transaction is reported on Monday (not Friday) even though the days of the transaction and the day of receipt fall on different months, quarters, or years. It also adjusts to other factors that may be affecting youSpur, such as B. Changes in current liabilities.
The indirect formula starts with your net income and works backwards, accounting for changes in current assets and liabilities and non-cash items.
Operating cash flow (indirect method) = net income (+/-) change in assets and liabilities + non-cash expenses
The main advantage of the indirect method is that income and expenses are recognized in the period in which they are incurred. Money takes time to move. Using the direct method can skew your perception of cash needs as they change throughout the year.
While the direct method gives you the most accurate picture of where your money is right now, the indirect method is much more useful for getting an accurate picture of your company's current and future finances.
Track cash flow from operations with Mosaic
When you zoom in on your company's cash flows from regular operations, you can understand the big picture down to the smallest detail. The more accurate your view of cash flow from operations, the more accurate your understanding of the integrity of the core business will be and the more efficiently you will be able to conduct your business.
But the labor cost of real-time tracking is unrealistic. Mosaic syncs with your source systems, so your data reflects any real-time updates. Plus, with pre-installed dashboards and templates (like the cash flow dashboard), you can free yourself from data manipulation and consolidation and focus on making your company's financial narrative capture your audience's imagination—whether that means giving management a spin or inspiring the next venture capitalist to invest in.
Mosaic cash flow analysis financial dashboard
Plug-and-Play von MosaicFinance Dashboardhelps you monitor real-time operational cash flows and enables you to go from data to insights faster.Request a personalized demoknow how.