Cash flow
kash floh
The actual movement of cash in and out of your business. Different from revenue because it includes timing of payments, not just accrual accounting.
Cash flow is the actual movement of money in and out of your bank account. It differs from revenue because revenue is recognized according to accounting rules, while cash flow reflects when money actually arrives or leaves. A customer who signs a $120k annual contract on January 1 and pays net-30 contributes zero cash flow in January and $120k in cash flow in February.
SaaS companies have a natural cash flow advantage when they collect annual prepayments. A customer pays $120k upfront for an annual subscription. That is $120k in cash on day one, even though only $10k is recognized as revenue each month. The gap between cash collected and revenue recognized creates positive operating cash flow.
Cash flow positive is different from profitable. A company can be cash flow positive (collecting more cash than it spends) while reporting accounting losses (due to deferred revenue and other timing differences). Conversely, a company can report accounting profits while being cash flow negative (if customers pay slowly).
Examples
Annual prepayment improves cash flow.
A company offers 20% off for annual prepay. 60% of customers choose annual. Average annual contract: $24k. The company collects $14.4k per customer upfront (60% * $24k) versus $2k/month from monthly customers. Annual billing transforms cash flow by front-loading collections.
Cash flow versus profitability.
A company reports a $2M loss for the quarter. But operating cash flow is positive $3M because customers prepaid $5M in annual contracts. The company is losing money on paper but accumulating cash in the bank. This is common in fast-growing SaaS with annual billing.
Negative cash flow from slow collections.
An enterprise SaaS company has $10M in quarterly revenue but $4M in outstanding receivables (customers who have not paid yet). Net-60 payment terms mean cash arrives two months after the invoice. Meanwhile, payroll is due every two weeks. The company is profitable but cash-flow constrained. They get a credit line to bridge the gap.
In practice
Read more on the blog
Frequently asked questions
How can a profitable company have negative cash flow?
If customers pay slowly (net-60 or net-90 terms) but expenses are due immediately, cash goes out faster than it comes in. Also, capital expenditures (buying servers, office buildout) reduce cash but are depreciated over time in accounting, so they do not show up as losses immediately.
Why is cash flow more important than profit for startups?
Because you cannot pay rent with accounting profits. You pay rent with cash. A startup that is profitable on paper but cannot collect from customers will fail just as surely as an unprofitable one. Cash flow determines survival. Profit determines long-term viability.
Related terms
How fast a startup spends cash each month. Gross burn is total spending. Net burn subtracts revenue. The clock on your runway.
Cash collected for services not yet delivered. A liability on the balance sheet that converts to revenue as you fulfill the contract.
The total amount invoiced to customers in a period. Revenue plus the change in deferred revenue. A leading indicator of future recognized revenue.
How many months a startup can operate before running out of cash. Cash in the bank divided by monthly net burn.
The day-to-day costs of running your business. Salaries, rent, marketing, cloud hosting. Everything that is not a capital expenditure.
Want the complete playbook?
Picks and Shovels is the definitive guide to developer marketing. Amazon #1 bestseller with practical strategies from 30 years of marketing to developers.