Why cash is king for startups

“Cash is king” is a centuries-old saying frequently used to highlight the importance of efficient cash management for a company. Without a sufficient amount of cash on hand,  entities can run into major crises and even be forced into bankruptcy.

Your business can have all the possible growth plans worldwide, but it will likely fail if you’re not generating cash. When times are hard or during periods of financial unpredictability, having cash reserves for your company is vital.

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Cash gives you possibilities and adaptability that you wouldn’t otherwise have. If you’re seeking to grow your company, it’s essential to have access to cash.

Table of contents

What is cash flow for startups?

Cash flow is a standard indicator demonstrating the cash result (net cash inflows and outflows) over time. Through financial analysis, startup managers or potential financiers are given an idea of the business’s ability to generate liquidity.

Cash flow is dynamic and unpredictable. If it’s not handled properly, it can lead to the end of an organisation. If not swiftly rectified, overspending can result in issues like an inability to pay wages to employees.

Unexpected expenses can weaken an organisation if there isn’t a contingency plan. And if revenue far outweighs expenditures and there is a large cash reserve, an organisation could stall if it fails to invest and grow to keep up with demand.

Also, cash flow forecasting involves estimating how much cash you have available in the company to keep going ahead.

It’s also very important to know the difference between cash inflows and outflows, which is explained below:

Cash InflowCash Outflow
It is the money that comes into a business.It is the money that goes out of a business.
It increases the cash balance of a companyIt decreases the cash balance of a company
Examples of cash inflow include return on investments, customer payments, loans received, etc.Examples of cash outflow include money spent on fixed assets, payments to suppliers, interest paid on loans, etc.

Why is cash vital to a startup business?

There are numerous advantages to efficient cash flow; these are just some of the most significant ones.

  • Improves organising and decision-making

A continuous cash flow allows you to build good cash reserves and makes planning simpler.

Any plans for expansion and growth will rest on your business’s cash flow. Positive cash flow makes planning much simpler without the fear of paying expenses.

It also implies you can take the time to make tactical, long-term choices that will benefit the company.

  • Gives businesses peace of mind

As a new business owner, there’s a lot to worry about. Having a strong cash flow provides you with fewer things to worry about.

Knowing that your company has the resources it requires for continued success can assist you in concentrating on other things while offering you peace of mind.

If you’re a new business owner, ensuring you have sufficient funding is essential. Ensure your company has the resources it requires for continued success by ensuring you have sufficient funding.

  • Allows to take risk

A founder requires bold and courageous choices to continue to expand quickly. Taking risks makes more sense when a company’s bottom line is stable. Each company’s risk requires more resources, primarily cash.

Cash helps a business hire more people or make acquisitions; it also enables it to entice customers by offering products at a low or no profit, making the supply chain more efficient.

Modern markets require constant innovation, which can be an expensive and risky endeavour that may require immediate funds.

  • Helps to survive during an economic downturn.

Having cash on hand is essential for surviving a recession. An example of this is Covid-19. Bills continued to arrive even though many businesses closed, revenues fell, and many people lost their jobs or had their pay cut.

In the words of an expert economist, “Cash is king in the time of emergency.”

Because economies are cyclical, there will always be times when they need to perform to their full capacity. Such recessionary times do not usually take away your fixed expenses like mortgage or rent payments, loan payments, insurance, utility bills, etc.

Without enough money, companies might have to reduce staff, close their doors, or even declare bankruptcy; individuals might have to take on new debt or lose their investments.

  • Allows for company acquisition

One common way for companies to grow is to acquire other businesses within their niche or to expand into new areas.

Take a look at these real-world instances: eBay and PayPal, Disney and Pixar, and Exxon and Mobil.

There is one thing in common with all of these acquisitions: cash. With the required funding, these businesses could seize the once-in-a-lifetime chance to purchase a valuable business for a fair price. These kinds of acquisitions are extremely beneficial to the growth potential of any company.

  • Builds trust with shareholders

Establishing trust with stakeholders is critical to the success of a startup, and having a strong cash position is essential to this process.

It is a tangible example of a startup’s sound financial planning and management. A startup with substantial cash reserves is more likely to draw investors because they perceive it as a sign of resilience and capacity to withstand setbacks.

For employees, understanding that the business has ample cash fosters a sense of security, encouraging loyalty and commitment. Partners and suppliers gain confidence in working with a startup that can prove it can fulfil its financial obligations.

 A strong cash position serves as a basis for building trust, promoting goodwill among various stakeholders, and ensuring a startup’s operational stability.

Hire Startup Accountants

Work with a UK-based accountant for tax, accounting, payroll, & EIS/ SEIS needs.

Have a question? Call us on
0203 900 3500
Monday to Friday 9am – 5pm

Final thoughts

Lastly, Is cash everything?

Generating money cannot be a primary objective of a new company, but that is the bare minimum it requires.

According to a well-known saying,

Cash is a valuable tool that can open doors for startups and help them grow, making it an essential resource.

Ensure you prioritise cash, whether you are an individual or a business. Its availability is crucial for a company to seize numerous chances for growth and expansion and avoid the risk of failure.

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