Improving Cash from Operations: A Guide for Startups

Cash from operations is a financial metric used to determine the amount of money a company earns from its regular business activities over a given period of time. It’s a key indicator of a company’s overall financial health, as it’s used to assess a company’s liquidity and whether it’s able to meet its current liabilities.

Any business owner will understand the importance of having enough cash on hand to pay bills, cover employee salaries, and keep up with other financial obligations. That said, due to heavy investment in growth and development, many startups face negative cash flows in their first few years of business.

This article explores cash flow from operations, how it differs from investing and financing activities, and how startups can fix negative cash flow through a strong management plan. We'll also talk about how Wise Business is an easy, safe, and cost-effective way to manage your international business.

Table of contents
What is Cash from Operations? How to Calculate Cash from Operations 5 Ways to Improve Negative Cash Flow The Bottom Line

What is Cash from Operations?

To understand cash from operations, it’s important to start with an overview of the cash flow statement.

A cash flow statement is one of the three main financial statements required by standard financial reporting practices. This document is broken down into three separate sections—cash provided by operating activities, cash provided by investing activities, and cash provided by financing activities.

Cashflow from Operating Activities

Cash provided by operating activities shows how much money your company was able to generate from its core business activities, such as selling products or services, paying expenses, and managing working capital. Typically, it’s reported in the first of these three sections.

Examples of cash flow from operating activities include:
Cash received from customers
Cash received from sales of goods and services
Cash paid to suppliers for goods and services
Cash paid for operating expenses such as rent and utilities
Salaries and wages paid to employees
Income tax and interest payments

Cashflow from Investing Activities

The cash flow from investing section details the cash spent to purchase fixed or long-term assets such as property, plant, and equipment (PP&E), as well as any money earned from the sale of those assets.

Examples of cash flow from investing activities include:
Cash paid for property, plant, and equipment (PP&E)
Cash received from mergers and acquisitions
Cash received from the sale of marketable securities like stocks and bonds
Cash received from interest or dividends on investments
Cash received from the sale of PP&E

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Cashflow from Financing Activities

The cash flow from the financing section of a company's financial statement shows how a company obtains and manages capital. It includes inflows from issuing stock or debt, as well as outflows related to debt servicing, such as interest and loan repayments, dividend payments to shareholders, and share repurchases.

Examples of cash flow from financing activities:

• Issuing equity or stock to investors
• Borrowing debt from creditors or banks
• Repayment of existing loans or long-term debt
• Payment of cash dividends to shareholders
• Repurchase or buyback of company stock

Some business owners consider cash from operations the most important of the three cash flow types, since it measures what your business makes from its central operations, rather than its earning from selling off assets or refinancing debt. Also, companies with a stronger cash flow tend to be considered as having a better financial standing than those facing weaker cash flow.

However, in order to get a true understanding of your company’s financial situation, you’ll need to analyze all three cash flow types in combination. This is especially true for startups since they’re more likely to experience negative cash flow from operations than other businesses.

International businesses may also run into cash flow problems as they work to manage a global customer base and expansion into new markets. Solving current problems and strategizing to avoid them in the future is critical for long-term success.

Having negative cash flow isn’t a death sentence for your business. Many successful businesses have run into similar issues throughout their stages of growth. The key is to have a clear plan for achieving positive cash flow in the future and to manage resources carefully in the meantime.

How to Calculate Cash from Operations

There are two common ways to calculate cash flow from operations: the direct and the indirect method. Both methods result in the same net cash flow figure; however, they use different approaches to get there.

Hiring a certified accountant is a great way to understand which method makes the most sense for your business. Not only will these professionals provide expert insights, but they’ll also help you save time and avoid costly accounting mistakes when preparing your startup’s cash flow statement.

Indirect Method

The indirect method of calculating cash from operations begins with the net income found on the income statement. From there, you’ll add in non-cash expenses like depreciation and amortization and adjust based on changes in net working capital.

Cash Flow from Operations = Net Income + Non-Cash Expenses +/– Changes in Working Capital

Many accountants prefer the indirect method of calculating cash flow from operating activities. It’s considered to be easier to use, since it relies on metrics that are already available on the company’s balance sheet and income statement.

Direct Method

By comparison, the direct method for calculating cash from operations is more, well, direct. It’s calculated by listing out all cash transactions from operating activities. You’ll add in items like cash received from customers, while subtracting items like cash paid to suppliers and cash paid for salaries.

5 Ways to Improve Negative Cash Flow

Many startups need to invest heavily in product development, marketing, and talent acquisition in their early years on the market. Depending on their revenue model, they may receive smaller, more consistent payments from their customers, rather than large sums up front, further delaying their ability to generate significant revenue. Also, a tendency to prioritize rapid growth over immediate profitability results in higher expenses in the short term.

While negative cash flow can be part of the growth process, it's crucial to manage it carefully. That’s especially true if you’re seeking investors for your startup, since most interested parties will evaluate this metric—among others—before becoming financially involved in a company.

Let’s explore five key tips for fixing negative cash flow and helping your startup achieve long-term success.

1 - Monitor Cash Flow Closely

Startup owners looking to improve operating cash flows should keep a close eye on inflows and outflows. Ensure that essential expenses can be covered and bills can be paid on time while your company grows. Cash management software and other accounting tools can help automate cash flow calculations, generate reports, and provide real-time insights into how you’re spending your money.

These tools are a great way to make more informed financial decisions for your startup. For example, you can identify areas for improvement and deploy the latest insights to spend more efficiently. Over time, you’ll be able to decrease the amount of cash flowing out while increasing the amount of cash flowing in.

2 - Plan for Cash Flow Neutrality

More effective cash flow management is just one-way startups can work towards cash flow neutrality. As your company grows, you’ll want to continue to develop and deploy strategies to help your company break even—and ultimately achieve positive cash flow.

As part of your plan, you might consider increasing prices or tightening the terms you offer to your customers. However, you’ll want to deploy this strategy with caution to avoid driving any of your customers away. Consider offering discounts, promotions, or other incentives to attract more customers and generate additional revenue. Also, you might explore entering new markets or introducing new products to diversify income streams.

3 - Optimize Cash Conversion Cycle

The cash conversion cycle describes the amount of time between when a company pays for inventory and when it receives cash from selling its products. Optimizing CCC is another great way to fix negative cash flow by getting cash faster while reducing costs.

Improving your cash conversion cycle by implementing strategies to collect receivables faster in order to reduce inventory holding time. Also, you can offer early payment discounts and implement automated invoicing systems to facilitate faster payments from your customers. Developing strategic relationships with key suppliers helps you negotiate better payment terms, too, so you can hold onto your cash longer.

4 - Efficient Inventory Management

Enhancing inventory management is another key strategy for improving your startup’s operating cash flow. Maintaining optimal stock levels minimizes the amount of cash tied up in excess inventory while ensuring your ability to meet customer demands in a timely manner.

If you run a product-based startup, you’ll want to consider deploying data analytics to predict demand or a just-in-time inventory system to ensure you’re replenishing stock only as its needed. Negotiating faster delivery schedules with suppliers can also help streamline stock levels.

5 - Secure External Financing

If you aren’t able to meet your financial obligations, you may need to consider external funding in order to bridge cash flow gaps in your business. As an example, you might consider options like lines of credit, revenue-based financing, or business loans.

Startup founders may also want to seek out venture capital firms and other high-net-worth investors. However, before you pitch your idea, you’ll want to make sure to track your burn rate in order to plan for funding needs accurately. Potential investors and lenders alike will want to get a clear understanding of your cash flow situation and your overall plan for achieving profitability.

The Bottom Line

Whether you’re running a high-growth startup or a small business with plans for international expansion, implementing a strong cash flow strategy is essential for ensuring you set yourself up for success.

Having negative cash flow from operations is a common experience for many early-stage businesses, so it’s not the end of the world. That said, any time the amount of money going out of your business exceeds the amount of money that’s coming in, you run the risk of failing to meet critical payment deadlines for employees, suppliers, and creditors alike.

Effective financial planning makes all the difference. Take the time to gain a deep understanding of your startup’s current financial situation. Analyze how cash flows in and out of your business and make plans to optimize those cash flows to maximum success. The right strategy positions your company for both short-term and long-term success, with the potential to grow and expand with confidence.

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