Cash Flow
Also known as: Cash Flow StatementOperating Cash FlowFree Cash FlowFCFCash Position
💡The Concept
Cash flow is the actual money moving in and out of your business — not revenue, not profit, but real dollars in your bank account. Revenue is an accounting concept (you 'earned' $100K); cash flow is a reality concept (you 'received' $80K and 'spent' $95K, so you're $15K poorer). Companies die from running out of cash, not from unprofitability. 82% of small businesses fail due to cash flow problems, not lack of demand. The three types: Operating Cash Flow (from business activity), Investing Cash Flow (buying/selling assets), and Financing Cash Flow (debt, equity).
⚠️The Trap
The trap is confusing revenue with cash. A SaaS company booking $500K in annual contracts sounds healthy — but if those contracts are paid monthly ($42K/month), and you spent $200K this month on salaries and $100K on marketing, you're cash-flow negative by $258K THIS MONTH despite being 'profitable' on an annual basis. Enterprise SaaS is worse: Net-60 or Net-90 payment terms mean you deliver value for 3 months before receiving a single dollar. Many profitable companies have died because they couldn't cover payroll while 'waiting for invoices to be paid.'
🎯The Action
Calculate your monthly Operating Cash Flow: Cash Received (not revenue booked) − Cash Spent (not expenses accrued). Track the gap between revenue recognition and cash collection (DSO — Days Sales Outstanding). Target: DSO under 45 days for SaaS, under 30 for e-commerce. Build a 13-week rolling cash flow forecast: project every cash in-flow and out-flow weekly. Never rely on revenue projections — only count cash when it hits your account.
⚡Pro Tips
Annual prepayment discounts (e.g., '20% off if you pay annually') are a cash flow weapon. If 40% of your customers pay annually, you front-load 40% of your revenue — dramatically improving cash position even if revenue doesn't change.
Track 'cash conversion cycle': how quickly a dollar spent turns back into cash received. A SaaS company spending $1 on marketing should track how many days until that $1 generates $1+ in actual cash receipts (not just a booking).
A business can be GAAP-profitable and cash-flow negative for years. WeWork reported $1.8B in revenue in 2018 but burned $2.1B in cash. Profit on paper ≠ money in the bank.
🚫Common Myths
✗Myth: “Profitable companies don't have cash flow problems”
✓Reality: Fast-growing profitable companies are the MOST susceptible to cash flow crises. Growing 100% YoY means hiring ahead of revenue, paying for infrastructure before usage catches up, and extending credit to new customers. Many hypergrowth companies are 'profitably bankrupt' — profitable per unit but cash-starved from scaling.
✗Myth: “Negative cash flow always means the business is unhealthy”
✓Reality: Amazon was cash-flow negative for its first 6 years and negative on free cash flow for even longer. Negative cash flow from deliberate investment (R&D, customer acquisition) is strategic. Negative cash flow from operational inefficiency is dangerous. The source of the cash drain matters more than the drain itself.
📈Industry Benchmarks
Days Sales Outstanding (DSO)
B2B SaaSElite
< 30 days
Good
30-45 days
Average
45-60 days
Needs Work
60-90 days
Critical
> 90 days
Source: SaaS Capital 2024 Benchmarks
Free Cash Flow Margin
Growth-stage SaaS ($10M+ ARR)Elite
> 25%
Good
10-25%
Average
0-10%
Needs Work
-10% to 0%
Critical
< -10%
Source: Bessemer Cloud Index, 2024
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