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Cash flow (or liquidity) is the amount of cash flowing in and out of your business. This may seem like a no-brainer but, ultimately you want a positive cash flow – often referred to as cash positive.

It’s no shocker that negative cash flow accounts for 82% of small business and startup failure.

Examples of cash flowing into your business include payments received from customers, plan upgrades, sales of assets, etc.

*Note: In a SaaS company, you might not receive all of your cash up front when someone signs a subscription contract. So, your cash flow goes into accounts receivable (a.k.a. “what you’re owed”). The total amount owed on a contract is called Total Contract Value (TCV).

Examples of cash going out include payments and expenses like office rent, utilities, loan payments, and taxes.

Monitor cash flow

The best way to monitor cash flow is to keep track of your checking account transactions. It’s easiest to use an accounting software program like Quickbooks or Wave (Wave is free, but does much less than QuickBooks). You can plug your checking account into these apps. They’ll track cash flow for you and prepare Cash flow reports.

*Note: Just because these apps will track your transactions doesn’t mean you shouldn’t double-check that everything is labeled correctly, entered appropriately, etc.

How cash flow reports benefit SaaS businesses

Cash flow reports show money received and money paid out during a selected period (like Q1 cash flow, or June 2017 cash flow). Keeping a close eye on liquidity can help you find excessive expenses as well as opportunities.

Keep yourself afloat in the beginning

When you’re just starting out, you probably have a negative flow of cash since you’re paying for things like software development, first-hire salaries, and other expenses (without revenue coming in).

Use cash flow reporting to stay lean. Trim unnecessary expenses like unlimited cell phone data (when most places you go have wifi) and monthly k-cup deliveries. There are plenty of ways for startups to save money.

Visualize for a better future

Having your money ins and outs plotted in a report can make it easy to look ahead. You can spot things like, “Woah, we’re spending $200 a month on printer paper. Maybe we could digitize some of this?” Or, “We’d save $500 a month if we bundled our wifi and cell service with a new provider.” Or even, “Wow, we had a great month sales-wise, we should keep doing what we’re doing.”

Imagine worst-case scenarios

You can also plan for the worst. What would happen to next quarter’s cash if churn increased? What would you do if your biggest customer(s) neglected to pay their fees for six months?

Plan for that churn increase, and plan to slay it. Narrow-in on your biggest client(s) and set up killer customer support to keep them around.

Upcoming expenses and MRR

In SaaS, we’re focused on MRR, and therefore we’re often counting last month’s money today. This is all well and good, but remember, your bills for this month are due this month. Make sure you’ve got accurate details on future expenses. Payments from customers can be declined or refunded, and sometimes clients cancel subscriptions.

Take a look at your future expenses and understand what’s going to be coming out of your pocket. Will you need to hire anyone next month during the same period in which you need to pay quarterly taxes?

Moral of the story

You might need to tighten the reins occasionally, even when you’ve got decent amounts of money coming in. Use cash flow to visualize what you want for your future as well as dreaded scenarios.

Upcoming Lesson

Setting Goals

Goals! Knowing what your MRR is, but setting realistic goals and taking steps to meet them is another. We’re going to show you how to do just th...

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