Example of a Cash Flow Statement for Startup Business

What Is A Cash Flow Statement

A cash flow statement is a document that highlights the cash inflows and outflows of a business to enable effective cash management. It records incomes and expenses when they are received or paid as opposed to when they become due. It is one of three essential financial statements for any company, the other two being Balance Sheets and Profit and Loss Accounts.

A cash flow statement is a compulsory document to file with the Hong Kong Companies Registry. However, it serves a purpose way beyond regulatory requirements. A cash flow statement for startups is an essential tool to ensure continued success.

As we serve startups across Asia, we observe cash flow problems to be a recurring issue for young and budding companies. In fact, liquidity and cash flow issues have been highlighted as one of the main reasons why startups fail. A well-constructed cash flow statement helps with efficient cash flow management for startups.

1. Where Is The Money Coming From?

A big challenge for startups is to track the source of funds. As a startup, founders get so caught up in the success of the business that they fail to track cash flows. As a result, the different sources of funds are often missed. If you are making more money from investment returns than revenue, your business is not on the right path. You should be able to identify this and make changes. A cash flow statement can help you with this.

2. Are Your Suppliers Getting Paid?

Startups usually don't have the wherewithal of big companies. This means that purchasing goods on credit becomes a problem. Often, you may have to pay your suppliers up front. However, if you spend all your cash flow on supplier payments, you may not have much money left for other important tasks like marketing or paying employees. Smart cash flow management for startups ensures that you are able to manage your payments to keep all stakeholders happy.

3. How Are Investors Feeling?

A strong cash flow statement for startups helps keep investors satisfied. When they see that your revenues are strong and you are getting paid on time, they believe that your company is set up for success. Investor money is finite, meaning it will run out eventually. Even if you have sufficient funds from investors in the present, you should work on improving your cash flows to meet business expenses.

Components of A Cash Flow Statement

In compliance with Hong Kong Financial Reporting Standards (HKFRS), the mandatory items of a cash flow statement are as follows:

1. Operating Activities

Operating activities take into consideration cash obtained or used from your startup's operational transactions. This portion of the cash flow statement allows you to identify sustainable cash inflows, management of working capital, and early detection of liquidity issues.

2. Investing Activities

Investing activities indicate cash flow from acquisition and disposal of assets and investments. This section highlights lucrative investments and flags less profitable ones that produce non-recurring returns.

3. Financing Activities

Financing activities take into consideration cash movement from changes in liabilities and shareholder's equity. This portion highlights cash flow from financing activities such as term loans and the purchase of shares.

4. Net Cash Flow

Also known as net working capital, this is the difference between your startup's cash inflows and outflows. A positive cash flow indicates that a company's current assets are sufficient to fund its current liabilities.

Conversely, a negative cash flow indicates that your current liabilities are higher than your current assets. In the short-term, a negative cash flow is fine as it could mean that you just bought a large amount of assets. However, if your startup business is facing a negative cash flow for extended periods, this could potentially be a problem.

Cash Flow Statement Example

Constructing the Statement of Cash Flows from scratch can be an uphill and intimidating task for startups that are new to this. Here's a practical example that follows the Hong Kong Companies Registry requirements:

Sample Cash Flow Statement

Why Are Cash Flow Statements Vital for a Startup's Success?

Cash is king. Without sufficient cash, a startup may find itself in a sticky spot, unable to pay suppliers, employees and other key stakeholders.

If you don't pay suppliers on time, they may be unwilling to do business with you. This will lead to production problems and other issues for your business.

If you don't pay employees on time, they may leave the company. A talent crunch can result in poor performance and work delays.

Even if you get funding or VC money as a startup, it is important to do smart cash flow management because you need to maintain a runway until your next funding round and manage that efficiently.

Challenges to Cash Flow Management for Startups

Now that you know what a cash flow statement is and what it comprises, let's understand the need for cash flow statements for a startup. A new company has many challenges that hold it back from flourishing. A low cash flow is a common reason why startups are stumped. When a startup tries to manage its cash flows, it faces many challenges.

Underestimating Costs

A new startup may often struggle to estimate costs correctly. Very often, being too optimistic about estimates can lead you to a cash crunch later. Without sufficient historical data, you may find yourself understating costs. Always err on the side of caution when you estimate startup costs.

Missing High Overheads

A new business will have limited resources. Spending too much on overheads can run you into cash problems. If your rent is as high as a mature business or you are giving your employees too many perks, you may run out of money sooner than expected.

Taking On Too Much

You may want to grow quickly and jump on every opportunity to prove you can succeed, but this can result in cashflow problems. For instance, if you take on a client that requires your employees to put in extra hours, you will have to compensate them for that. However, if payments are due only after the project is completed, if the timelines don't match, you may not have cash to pay wages.

Predicting Profitability Early

If you are unrealistic about when you will achieve profitability, you may lead yourself into money flow issues. Consult a business expert to understand realistic timelines for your business based on sustainable growth.

Managing Startup Working Capital

As illustrated in the sample cash flow statement, the sources of working capital can be condensed into 4 "C"s:

• Collection of payment from customers
• Credit terms paid to suppliers
• Credit facilities
• Cash on hand

With these in mind, your startup can look to generate healthy cash flow through the following methods.

1. Collect receivables before payable due dates

Collecting payment from customers before financial obligations are due ensures that your startup has sufficient funds to pay your suppliers. This can be done by shortening the payment term for customers or giving them discounts for making early payment.

In addition, negotiating for a longer credit term with your suppliers also gives your startup more time to gather cash inflows from customers.

2. Reduce inventory

In monitoring your startup's inventory levels, sieve out slower-moving products. You should buy or produce less products that accumulate huge amounts of stock.

This frees up cash that was once tied to inventory, enabling your startup to channel these funds towards timely payments. This cash can be spent on meaningful marketing strategies that increase sales for potential business expansion.

3. Make investments

A high net working capital does not equate to a healthy cash flow. A large cash flow can mean that your startup is not fully utilising its available cash to maximise growth.

Instead of leaving cash on the table, seek out money-making investments or new growth opportunities such as expanding your business product line or entering a new market.

Steps to Create an Excellent Cash Flow Statement for Startups

Creating a perfect and accurate cash flow statement for startups comes down to how well you understand your own business, keep track of cash and record them on time. Here's how you can improve cash flow management for your startup.

Understand Cash Flow Statements

Before you get into creating a cash flow statement for your startup, spend time understanding how cash flow statements are actually constructed. As outlined above, cash flow statements comprise of four components - Operating Activities, Financing Activities, Investing Activities, and Net Cash Flow. Take a look at all your operations and categorise each of your income and expenses into these buckets. This will help you record cash flows when they arise.

Gather Data

Take a look at all your financial statements to gather data. You should be studying your Balance Sheet, Profit and Loss Account, Trade Account, Equity Statement, Invoices, contracts, investments and any other material statements. This will give you an insight of what to look out for when preparing your cash flow statement.

Record Inflows and Outflows

Using your financial statements and other documents, record the different inflows and outflows in your cash flow statement. For instance, you can track the opening and closing balances of different line items on your balance sheet. You can then find out why these differences occurred. This will help you track cash movement.

Adjust for Non-Cash Items

Your balance sheet will contain many ups and downs that are not cash-based. For instance, depreciation and goodwill are not cash items. Or, interest on investments may have accrued but not received yet. You should adjust these items in your cash flow statement.

Perform a Final Check

After the above steps, your cash flow statement should be ready. However, to ensure accuracy, go over your cash flow statement to see if you have missed anything. You could also rope someone else in to check for any mistakes.

Healthy Startup Cash Flow Management

The cash flow statement continues to be a highly important financial statement for your business — for both legal reasons and measuring your business' health. A healthy cash flow is key for a startup to thrive and can be managed through analysing various aspects of the cash flow statement.

To ensure your business’ sustainability, you must manage your cash flows efficiently and adequately.