357407679_a3e85210f2 (1)

Investor money, sales and loans are ways cash gets into a business. Salaries, rent and maintenance are ways cash leaves it.

Cash flow simply is how cash moves into and out of a business, due to business operations.

Meet Jude

He owns greenrangertech.com, a security tech startup that installs remote controlled pepper sprays disguised as fire sprinklers. At the beginning of the year, he got N1 million in funding. And within the year the company installed 2000 pepper sprinklers that brought in an additional N1 million in the year. He didn’t take any loans.  

Jude now has N2 million ($10,000) as cash inflow for the year.

He’s spent N500, 000 paying salary of his five employees and himself, another N500, 000 on product development, N200, 000 on logistics, N100, 000 on upgrading  greenrangertech.com, and N100, 000 on rent.

Jude now has N1.4 million ($6,000) in cash outflow. How the cash converted from funding and revenue, to salary, product development, logistics and rent is cash flow. Meanwhile, Jude is cashflow positive.

More on that:

A startup with more cash going into the business than going out is considered cashflow positive. Flip the coin however – more money going out than coming in – and it becomes cashflow negative.

Cash flow is essential to the survival of any business. Over 90 percent of startups fail because of poor cashflow management. So it’s important it is properly tracked.

If a startup is losing money faster than a rockstar at a Saturday club night with no way to fill up the money chest, it is headed to the gallows. It’s worse if the startup does not know what part of the business is the biggest drainpipe.

One way to avoid sloppy cashflow management is to hire a CFO – chief financial officer.

While negative cashflow implies possible demise, positive cashflow is not an assurance of survival. For one, it does not mean profit or high revenue or growth. It may simply means the company is being miserly. Which is not bad thing when you think about it.

Photo Credit: svet via Compfight cc

Gbenga Onalaja Author

Get the best African tech newsletters in your inbox