How to read Cash Flow
“I don’t know how to analyze cash flow.”
Let me eliminate that excuse for you right now with a step-by-step guide that’s guaranteed to bring clarity.
Here’s how it works:
- Sections to Focus On
→ Operating Cash Flow:
Look at cash generated from core business activities.
→ Investing Cash Flow:
Monitor cash spent on assets, acquisitions, or investments.
→ Financing Cash Flow:
Track cash moving between your company and investors or creditors.
→ Foreign Exchange & Other:
Consider any impacts from currency fluctuations or adjustments.
- Key Concepts to Understand
Cash & Cash Equivalents:
→ Cash: What’s sitting in your bank.
→ Cash Equivalents: Liquid assets maturing within 3 months (e.g., Treasury bills).
Free Cash Flow (FCF):
→ FCF = Operating Cash Flow – Capital Expenditures.
→ Essential for SaaS companies to generate consistent positive cash flow for sustainable growth.
- Practical Steps for SaaS Companies
Cash flow isn’t just about profits; it’s about liquidity.
Here are some pointers to start:
→ “Check your net income adjustments for stock-based comp or amortization.”
→ “Identify any changes in operating assets/liabilities, like receivables or inventory.”
→ “Track your cash outflows on R&D, sales commissions, or any capital expenses.”
If you focus on these steps, it’s literally impossible not to understand some amount of your cash flow.
Now, dive into those numbers.
PS. Join 5000 people at: thestartupfinance.com