‍5 Key Cash Flow Metrics to View

Cash flow metrics are important financial measures and ratios that help assess and analyze how well your company manages its cash flow. By having insights into how effectively your business manages the money coming in and going out, not only will you feel more at ease, but your executive team and investors will too.

Here are five key cash flow metrics that successful founders and investors always keep in mind:

01

Operating Cash Flow (OCF)

OCF represents the cash generated or used by a company's core operating activities. Basically, it tells us how money moves in and out of a business and how well the company can generate cash from its day-to-day operations.

‍Operating Cash Flow = Net income + Non-Cash Expenses + Change in Working Capital

*Note: This metric does not include revenue from interest or investments.

02

Gross Burn

Gross Burn refers to the total operating costs incurred over a specific period, usually a month or a quarter. Operating costs encompass expenses such as rent, advertising, research and development, and so on. Essentially, it represents the amount of cash a company "burns" or spends on its day-to-day and non-operational activities before factoring in any cash inflows.

Gross Burn = Total Cash Outflows (Outflows are anything like rent, advertising, research and development, etc.).

03

Net Burn

Net Burn is the rate at which a company uses or generates cash to cover its operating expenses. It gives you a complete view of the company's financial health by taking into account both its income and expenses.

‍Net Burn = Monthly Operating Expenses - Total Revenue

04

Cash Runway

Cash Runway is basically an estimation of how long a company can keep on operating without running out of cash. Companies often use this metric in their financial planning to figure out when they might need more funding or have to make some cost-cutting choices to extend their runway.

‍Cash Runway = Cash Balance / Average Monthly Cash Burn Rate

05

ARO (Days from Invoice to Cash)

ARO (Days from Invoice to Cash) measures the average number of days it takes for a company to collect payment from customers after sending out invoices. Essentially, ARO shows how well the company is managing its accounts receivable.

‍ARO (Days) = (Accounts Receivable / Total Sales) * Number of Days in the Period

There are several other cash flow metrics to consider, but how important they are can vary depending on the industry and your specific financial goals as a company.

As a founder, you can use the information above as a guiding compass on your path to financial success.

Strategies for Optimizing Cash Flow

Generating revenue is important, but what's even more important is taking care of your company's financial health. Cash flow is what keeps any business running smoothly. For startups or scaleups like yours, managing cash flow effectively is what sets you apart from those who are barely making it. When you have a good handle on your cash flow, you'll have enough money to cover your day-to-day operations, pay your bills, and seize growth opportunities.

So, how exactly do you make this happen?

FOCUS

Ever heard of the phrases "let fires burn" or "eliminate the noise"? We totally agree! The key is to stay focused.  It's one of the most effective strategies for bettering cash flow in your business.

As a startup or scaleup founder, it's easy to get caught up in the idea that you need to tackle every opportunity and challenge that comes your way. But focusing on what you excel at will allow you to generate a steady income, which will have a positive impact on cash flow.

Here are a few approaches to improve your focus:

‍Targeted Customer-Centric Approach means focusing on a specific customer segment and aligning your resources to meet their unique needs. It's important to spend enough time and resources understanding this core customer and boosting customer retention. By identifying and addressing concerns, you show a commitment to customer satisfaction, preventing issues from escalating and leading to customer churn.

‍Marketing and Sales have a significant positive impact on your business's cash flow. So, ask yourself, are your marketing and sales efforts actually working? If not, take a step back and reassess your strategies, making the necessary adjustments to better your financial outcomes. If yes, keep monitoring and fine-tuning your strategies to maintain and further enhance your financial performance.

Remember, having a focused marketing effort is crucial. Even the best product won't sell itself. Likewise, a company can't survive without profitable sales. So, establish a marketing department and compensate employees accordingly.

‍Explore Non-Dilutive Funding Options that don't require giving up shares or equity. There are different types available such as loans, grants, subsidies, tax incentives, strategic partnerships, and crowdfunding. By carefully evaluating and choosing the right funding sources for your business, you can improve cash flow stability and set yourself up for sustainable growth.

For instance, there are options like SR&ED, debt, and bespoke grants or government programs (CDAP, FedDev, CanExport).

‍Cost-cutting strategies

When it comes to implementing cost-cutting strategies, it's important for companies to strike a balance between quality and affordability. This doesn't mean compromising on the quality of products or services. Instead, it's about finding ways to streamline operations while still ensuring customer satisfaction. Two effective strategies for cutting costs include renegotiating contracts and automating processes. These approaches help businesses streamline their operations while still ensuring the quality of their offerings.

When you renegotiate contracts, you have the opportunity to discuss better terms with suppliers. By engaging in open and honest conversations, you can focus on lower prices and collaborate with them to find win-win solutions. This might involve adjusting contract terms, exploring other suppliers, or improving supply chain efficiency.

‍Automation is a powerful way to enhance operational efficiency and reduce labor costs. Take a look at repetitive and time-consuming tasks within your operations that can be automated. By investing in the right automation tools and software, you can cut down the time spent on these tasks.

| Example: you can automate invoicing and payment processing by using accounting software or cloud-based systems. By removing these tasks from employees, they can focus on more creative and critical thinking tasks.

Improve Cash Collection

Improving cash collection can actually boost your revenue and help you delay cash payments, creating a healthier cash flow. Here are a few ways how you can make it happen:

First, make sure to invoice promptly and accurately. You can easily automate invoicing and reminders, which will not only speed up the whole process but also ensure consistent communication. By doing so, it helps your customers remember and fulfill their payment obligations, reducing the chances of disputes or delays.

Another tip is to offer multiple payment options. We all know that some customers prefer paying with credit cards, while others prefer bank transfers or digital wallets. By giving them various payment methods to choose from, you remove any barriers that could interfere with the customer paying, making it more convenient for them to settle their bills.

| Tip: it's best to avoid accepting cheques, as they can be quite problematic for several reasons, especially if they're being sent by snail mail.

Early Payment Incentives can really boost your cash collection by offering discounts or other benefits to customers who pay their invoices ahead of schedule. It's a great way to motivate customers to settle their bills promptly, which helps improve your cash flow.

Annual Payment Discounts are pretty common in subscription-based or software-as-a-service (SaaS) businesses. By giving discounts to customers who choose an annual billing cycle instead of monthly payments, it encourages larger upfront payments, improves cash flow, reduces administrative overhead, and can make customers more likely to commit to a longer-term relationship with your business.

Recurrify Your Business Model to ensure a consistent flow of income and recurring cash flows. Even if your business isn't SaaS-based, think about offering subscription-like plans or maintenance contracts that provide steady revenue streams. 

| Example: Let's take a look at successful non-subscription companies, like Amazon. They generate recurring sales by offering subscription options for products like toilet paper. This just goes to show how effective it is to incorporate recurring revenue streams into different business models.

‍Maintaining customer retention and upselling additional products or services to existing customers is another effective way to increase the lifetime value of each customer and develop steady and growing cash flows. By focusing on retaining and upselling to your existing customer base, you can avoid expanding to new markets and exhausting your marketing and sales efforts.

Bottom Line

Managing cash flow effectively is crucial to achieving financial success for your startup or scaleup. It empowers you to navigate the complex landscape of funding, risk, and innovation with confidence. By mastering key cash flow metrics and implementing strategic approaches to improve cash flow, you're equipping your business for resilience and growth.