Cash is King (or Queen). However, it’s one thing to have cash in your bank, but it’s another to know how to manage it, what to do with it, and how long it’s going to last you. In the previous blog, What is Cash Flow? Revenue vs. Profit vs. Cash Flow, we discussed cash flow fundamentals. Now we will take that understanding one step further.
Keeping a healthy cash balance to run your business is like having enough fuel in your engine to get you to each destination. Cash is the fuel that runs the engine of your business.
A healthy cash balance allows you to:
Reinvest in your company
Accelerate debt payments
You’ve probably heard the term cash runway and have assumed it is interchangeable with cash balance. Although they’re similar and intertwined, let us walk you through how they differ:
Cash Runway is the length of time you have before you either turn cash flow positive or run out of money, and you have no more gas in the tank to run your business.
So while cash balance is how much money you have in the bank, (i.e., $500K), cash runway is the amount of time that number will last you (i.e., 18 months).
When figuring out your runway, you need to consider multiple scenarios that include expenses, sales, and your hiring plan.
Cliffhangers are underutilized in the startup and business world, but it’s a term worth knowing. Cash cliffhangers typically deal with two different points of your business: cash going out and cash coming in. For context, let’s go over what this means:
When looking at the AR/AP timeline, you have:
1) Date of invoice: when the invoice was issued
2) Payment due date: when payment is expected
3) Payment received: when payment is received
Payment terms are the time between 1) Date of invoice and 2) Payment due date.
The lag between 2) Payment due date and 3) Payment received is the Cliffhanger.
REMINDER: just because “the checks in the mail” doesn't mean you're going to get it on time (or ever).
Cash at risk is the money that is owed to you but not in your possession (not materialized). The longer that money is overdue, the higher the risk that you won’t collect it.
Typically, if you're dealing with cash coming and going directly into your account (what we like to call “cash efficient business models”), you don’t generally have payment terms or cliffhangers. However, some models like inventory-based businesses need to consider the realities and impacts of cliffhangers.
If someone else has your receivable in their bank account, it’s not in yours.
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