# ShARP Startup Cash Flow Guidelines

By Jacob Johnston - Sep 12, 2018

_Written By: **Jacob Johnston**_

Most entrepreneurs make deceptively simple mistakes regarding resources. If you don’t get into good habits early on, you’re setting yourself up to learn some _really rough lessons_ the hard way.

Cash comes in and out of any business. In most cases, the ins and outs spike at different times. So, your cash-gas-tank gets fuller and emptier in a cyclical way. You’re going to want to watch that needle. Just being cognizant and keeping track is vital. Cash flows are a little more complicated than a gas tank though; _"The Bottom Line" is just the end result._ There’s no gas pedal and there are no breaks. Your business is a complex machine and every little part uses fuel, while some parts contribute fuel to the system, so it's more like an organism or life form than an engine.

## ShARP  ™

**Sh** are

**A** nalyze

**R** ecord

**P** redict

But in a different order... Record, Analyze, Predict, and Share cash flow data for best results. With modern technology there's little excuse. A lone founder can link his business account to tools that capture the data and offer convenient ways to get value from it.

### **Record** your cash flows

Many small businesses can't answer simple questions like "how much money does your business make each month?" - obviously this won't do. It may seem like a lot of legwork to keep track of every penny that comes in and out of your startup but there are a lot of simple tools to help. Some of them are free, but the most popular cost something. Let me know in the comments if you'd like another post (or details on this post) listing and comparing some tools.

Ultimately you should be able to break down what fraction of your revenues come from different sources, and do the same for your costs, and make correlations between these costs and revenues. As you grow you'll want to identify discrete "cost centers" and break ROI down into different elements, not just one big number. You should be able to answer questions like which cash sources account for what fraction of revenues and know the different margins for each source. Which brings us to...

### **Analyze** your cash flows

Once you have all this data in an organized system, you can and should conduct frequent analysis. You _should_ be able to chart out shifts in the share of revenues coming from different sources and theorize on the causes. You should be able to answer unexpected questions from your founding team, investors, and others, even if it means asking them to wait while you crunch the numbers.

Cash flow analysis allows you to think about and perceive your business in more elegant ways. It allows you to convey complex information with simple formulas and charts. Cash flow analysis helps you understand your business. After all, when it comes down to it all businesses are cash flow engines in a capitalistic system. We may do different things with different resources for different customers, but at the end of the day we operate in a capitalist economy and there’s no escaping the bottom line. Cash flow analysis helps you make important decisions. Which brings us to…

### **Predict** your cash flows

With detailed records and consistent analysis, you can begin to pick out patterns and make more accurate predictions, which in turn help you and your investors make better informed decisions. This is the essence of wise investment. You should never invest money in a game of chance unless you’re committed to an act of gambling.

Once you get in this loop of recording, analyzing, and predicting your cash flows, you’ll be able to iterate on the process and get better at each part. Your analysis informs improved record keeping. Your predictions guide your analysis. And better records feed the downstream efforts.

This is how you avoid going out of business, or at least get a heads up if you’re about to go out of business. The investment you make in understanding your cash flows may have a higher ROI than just about anything else.

And finally...

### **Share** the information

Those in charge of the money often feel inclined to keep a tight lid on vital information. Naturally, there is some information you just shouldn’t share. For instance people don’t need to know what everyone else earns. That’s just a recipe for dissension. However, anyone making important decisions about the money should know about the money. They should know what they need to know to make good choices.

And they should make decisions about resources. Once any company gets beyond a certain size owners need to step back. Not too far back, just don’t micromanage. They can’t be bothered with writing every check and approving every purchase. I’ve seen this time and time again and any decision bottleneck puts hard constraints on growth. Financial data is the pulse of business. Sometimes it’s easier to take someone else’s pulse than to take your own.