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Understanding cash flow for startups: A practical guide for founders

Learn how to read your cash flow statement, track your burn rate, and avoid financial surprises.
Finance
April 30, 2025
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7 min.

Cash is the lifeblood of your startup. It fuels your growth, covers your team’s salaries, and keeps the lights on. But for many early-stage founders—especially those operating without a CFO—cash flow management feels like a mystery wrapped in spreadsheets.

This post will help you understand what cash flow really is, why it’s different from profitability, and how to use your financial statements to avoid unexpected shortfalls. We'll break down the three core financial statements and show you how they work together to give you a clear picture of your startup's financial health.

👉 Book a free consultation with our team to review your startup’s cash flow setup and plan your next financial move.

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Why cash flow matters more than you think

You can be profitable on paper and still run out of cash. That’s because cash flow isn’t just about how much you’re earning—it’s about when you actually receive and spend your money.

For example, if you close a $10,000 deal today with net-60 payment terms, that cash won’t hit your account for two months. But if payroll is due next week, you’ll be in trouble—even though you technically made a sale.

This kind of mismatch is common in startups, especially those working with long sales cycles or offering payment terms. And in today’s unpredictable markets, a single missed payment can threaten your entire runway.

Understanding your cash flow isn’t optional. It’s foundational.

Start with the income statement: Spot the trends

Your income statement (also known as a profit and loss or P&L) tracks revenue and expenses over time. Most startups use accrual accounting, which records income when it's earned and expenses when they're incurred—even if no money has changed hands yet.

This gives you a better sense of your business performance:

  • How much you’re selling, and how often
  • What your margins look like
  • Which expenses are growing

But here’s the catch: it doesn’t tell you how much cash you have. It tells you that you made $5,000 in income last week, but not whether the money has arrived. If you rely on the P&L alone, you risk making decisions based on money that hasn’t actually hit your account.

The cash flow statement: What’s really in the bank

If the P&L tells you what happened, the cash flow statement tells you what’s real.

It shows your startup’s actual cash position—how much you started with, how much came in or went out, and how much is left. It’s broken down into three sections:

1. Operating activities

This is the core of your business: revenue from sales, minus costs like rent, software, salaries, and vendors. It reflects your burn rate—how much you’re spending each month to stay in business.

If you’re burning more cash than expected, your runway is shrinking faster than you planned. Watch this closely.

2. Investing activities

These are long-term investments in your growth—think equipment, product development, or even acquisitions. It’s where you track capital expenditures. This section often shows cash outflows for early-stage startups.

3. Financing activities

This includes capital you raise—like a seed round—or loans you take out. It’s where the big inflows usually happen, but they tend to be rare and irregular.

Together, these three sections help you understand the flow of cash and where the pressure points are. But to plan ahead, you also need to understand what’s about to hit your bank account—and that’s where the balance sheet comes in.

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The balance sheet: What’s coming next

The balance sheet is your snapshot. It shows what your startup owns (assets), what it owes (liabilities), and what’s left over (equity).

Why does this matter for cash flow?

Because it helps you anticipate what’s coming:

  • That $5,000 deal you closed but haven’t been paid for? It appears in accounts receivable, which tells you it’s coming soon.
  • That $2,000 software bill you haven’t paid yet? It’s listed under accounts payable, warning you it will go out soon.

Your balance sheet is where cash flow and financial planning meet.

Using the balance sheet alongside your cash flow statement allows you to forecast shortfalls before they happen and make smarter spending decisions.

Why startups struggle with cash flow

If you’re bootstrapped or just closed your first round, chances are:

  • You don’t have a full-time finance team.
  • You’re relying on spreadsheets or basic accounting tools.
  • You’re not reviewing your cash flow weekly.

This makes it easy to miss red flags like:

  • Late-paying customers
  • Growing burn rate
  • Untracked future liabilities

That’s why even small startups benefit from a system (or team) that helps you stay on top of cash in vs. cash out.

The bottom line: Cash clarity = better decisions

Understanding cash flow isn’t just about avoiding a crisis. It’s about gaining control—so you can plan your runway, make smart hiring decisions, and feel confident going into a fundraising round.

You don’t need to be a CFO to get this right. But you do need:

✅ Clean and up-to-date bookkeeping
✅ Regular review of your three financial statements
✅ Tools or advisors that help you interpret them

Book a free call with our team

At Lazo, we help early-stage founders make sense of their numbers—without the overhead of a full finance team.

📞 Book a free consultation with our startup experts. We’ll walk you through your current cash position, identify potential risks, and help you design a financial setup that actually works.

Book a call with our Team!

FAQ: Cash flow for startups

What’s the difference between cash flow and profit?
Profit reflects earnings on paper. Cash flow shows how much money is actually in your bank account. You can be profitable but still run out of cash if payments are delayed.

How often should I review my cash flow?
Ideally, every week. Monthly reviews are a minimum. The earlier you spot an issue, the easier it is to fix.

What if I don’t have a finance team?
You’re not alone. That’s exactly why Lazo exists—to support founders who are building lean but need expert finance help.