Managing your cash flow may be the most important financial skill you’ll need to develop as an entrepreneur. You should know—by heart—what you are spending every month, when money is coming in, where to cut expenses and where to invest if given the opportunity.
What?! You don’t?
I’m only joking. I get it. I mean us entrepreneurs are not the most financially literate people. If we were, we probably wouldn’t start a company. It doesn’t make much financial sense in the beginning.
How many accountants do you see starting companies? That should tell you something.
So, What is Cash Flow Anyway?
Simply put, it’s the money “flowing” in and out of your business every month. When people pay you for goods and services, cash is flowing in. And when you pay for your rent, your salary or buy a new MacBook, cash is flowing out.
If you are cash flow positive, then the money coming in exceeds the money going out. That’s a good thing. If your expenses exceed your income, then you have a cash flow crunch on your hands. And that, as you might gather, that’s a bad thing.
The Balancing Act
Cash flow management can be pretty straightforward when you’re a soloprenuer. You have only one salary, you know all the clients and you don’t have a huge volume of transactions every month.
But that can change exponentially as your business grows. That’s because growth sucks cash and you’ll have to make a lot of decisions about your cash flow to keep your company afloat.
This is where the scary word financial modeling comes in. For a long time, that looked like an intimidating Excel sheet with plenty of formulas to break every time you try to make a new projection.
But that was so 2014. Today, there’s a FREE cash flow management tool for us melon-head entrepreneurs.
Enter Runway by LTSE Tools
According to their site, Runway is a free, visual tool to help you understand, manage and extend you cash runway.
Can you say music to my ears? Manage and extend a cash runway…visually! This tool was designed for entrepreneurs WITHOUT an accounting or financial background (which is probably damn near all of us right?).
Let’s see how this baby works…
How Runway Works
All you need to do is sign up for a free account and input your high level numbers like start date and your starting cash balance.
From there you add expenses, start dates and frequency. Next you’ll need to start capturing expenses (and don’t worry they have a list of the most common start-up expenses to jog your memory).
If you’re far enough along to have investment or revenue, you’ll enter that information as well. Of course, revenue is notoriously difficult to predict for start-ups, so do your best here.
As you put in information, you’ll start to see a nice visual chart that maps and projects your cash flow—auto-magically!
Fun with Financial Modeling
Now that you have your visualized cash flow, you can start having fun with financial modeling. And yes, I did just use fun and financial modeling in the same sentence.
Begin by asking yourself questions like: What would happen if we landed a $500,000 investment next month? What impact would hiring a COO have on our cash flow?
You can also try A/B scenarios and switch between them. For example, deciding between two office spaces. One has a cheaper monthly rent, but rent is due every three months. The other office is more expensive, but you can pay the rent monthly. Which do you choose?
Now you have an easy way of finding out. Input both expenses and toggle between the two. Without checking its impact on your cash flow, you’re flying blind. The cheaper option is not always the better option.
Wrapping Up Cash Flow
Mastering cash flow is one of the most important skills you need as an entrepreneur. As the saying goes, Cash is king. And boy is it. When you have cash, you can pay yourself, your employees and your creditors. You don’t need to take out loans. You keep the lights on and continue to grow your business.
Please, do yourself a huge favor, even if you are scared of numbers. Give Runway a try and see if you start making more intelligent business decisions because of it.
Have you used Runway before? Do you have an even better tool or strategy? Let me know in the comments below!