Analysing the Cash Flows of Start-up Businesses
In Chapter 3 I introduced the concept of start-up, growth, mature, decline as a way of comprehending the significance of cash flow information. One of the problems with the English language is that terminology expressed in English is often imprecise, meaning different things in different contexts. Terms in English are vulnerable to misunderstanding if the context in which the term is used is not defined.
The term ‘start-up’ can mean too many different things. We need to explore this difficulty further.
Early in the entrepreneurial process it means the intention to turn an idea into a business. Three years later the business may still be called a start-up because it has not yet begun to sell product. Indeed the term start-up may be used until the business turns a profit. From an analytical point of view this is a problem because the entrepreneurial entity is changing fundamentally throughout this process.
So, how do we analyse start-ups from a cash flow point of view?
In the early stages there is no cash flow from the business because trading with customers has not yet commenced. Earlier in the book I used the term ‘charity’ in a derogatory fashion for such situations because at this point owners and investors are essentially giving money to the entrepreneurial entity who, in turn, gives it to other stakeholders (employees, suppliers) with no immediate cash inflows arising.
Let us call the business a ‘start-up project’ for this ...