The income and cash flow statements are two of the most important financial documents that provide information about a company's performance. While they may seem similar at first glance, they provide different types of information, and in our opinion startups should be paying particular attention to the cash flow statement.
The income statement, also known as the profit and loss statement, shows a company's revenues and expenses over a specific period of time, such as a month or a year. It tells us whether the company made an accounting profit or loss during that period. The income statement is more useful than the cash flow statement for helping us understand if the company is profitable over time. It's also, of course, what valuations are typically calculated from.
The cash flow statement, on the other hand, shows the flow of actual cash in and out of a company. It breaks down the sources and uses of cash and shows how the company is generating and using that cash. Sounds pretty much like the income statement right? Here’s the difference: cash flow is the amount of actual money that flowed in and out of your business in a given time frame. It's what can actually be used to pay salaries, marketing expenses, etc. For many startups their customers will have long payment terms, in which case they may be building revenue, but not actually receiving money (cash) until a lot later. This can be a big problem if your company isn’t sufficiently funded, because you need to figure out a way to deliver your goods or services to your customers (which costs you money) without receiving money rom them until much later. It’s entirely possible that your business is profitable while having poor or even negative cash flow, and that can be a big problem!
It's entirely possible that your business is profitable while having poor or even negative cash flow
This is a problem even for venture funded startups, because they may still have limited access to external sources of funding at times (the current market environment in 2022 and early 2023 is a good example), and must rely on their own cash flow to finance their operations and growth. Good cash flow management is how you prevent your company from being reliant on outside financing, its how you minimize your equity dilution, and its how you change the stakes at the negotiating table when you do finally go out to raise capital.
Good cash flow management is how you prevent your company from being reliant on outside financing, its how you minimize your equity dilution, and its how you change the stakes at the negotiating table when you do finally go our to raise capital