Understanding Cash Flow Statements for Founders 

Key Takeaways:

• As founders of D2C businesses, you need to have a basic understanding of what a cash flow statement is, its components, and why it is important for your business.
• Many founders confuse cash flow with profit, but they are not the same. Many profitable businesses also shut down because of negative cash flow.
• You can identify the red flags in a Cash Flow Statement that may indicate potential financial or operational issues within your company.
• Snapmint’s EMI on UPI can enable your business to have an efficient cash flow by reducing RTO and increasing GMV to help improve the working capital of your company.

Introduction: Why Founders Must Understand Cash Flow

Almost 60% of the D2C startups fail within 2-5 years, not because of a lack of demand, but due to failures directly linked to cash flow issues.

That is why all founders need to know how to evaluate a Cash Flow Statement.

This ability would help you extract valuable data, track where money is coming from and going, adjust your strategies, and assess the overall financial health of your organisation.

More importantly, once you understand the cash flow statement, you will be able to assess the profitability and sustainability of your business and know when you may need funding.

For investors, too, a Cash Flow Statement is a key tool to decide whether your business is worth backing. So, every founder must understand the basics of the cash flow statement.

What Is A Cash Flow Statement?

Now that we have seen why cash flow matters, let’s take a closer look at what a Cash Flow Statement actually is.

A cash flow statement provides a detailed picture of a company’s cash transactions during a specified period.

In simple terms, it shows where the cash came from, where it went, and whether your firm has more or less cash than it started with during the accounting period.

Based on the company’s cash inflow and outflow in the business, founders can know how long the runway is and evaluate a company’s ability to operate in the short term and long term.

Types Of Cash Flow: The 3 Core Sections Of A Cash Flow Statement

As business owners, it goes without saying that you have hired the best and most competent accounting and finance representatives available in the market. So, you may not feel the need to understand the sections of this financial document yourself.

However, this insight allows you to be on top of your business, ask the right questions, and make more informed decisions.

There are typically three types of cash flow statements:

A. Cash Flow From Operating Activities

This statement includes both the revenue generated by your company from selling products and the expenses you have incurred to run the business - the money you have spent on carrying out your daily activities, such as salaries, rent, utilities, materials, etc.

If the number stays consistently positive, it means that your core business can sustain itself without depending on investors or loans just to operate. However, if your spending is more than your earnings, then your cash flow analysis will signal the need to make strategic adjustments.

Here’s a simple example of Cash Flow Statement From Operations:

B. Cash Flow From Investing Activities:

This section of the statement includes cash flow related to selling or purchasing any assets such as equipment, warehouse infrastructure, technological tools, or platforms. These are not everyday expenses. You incur these expenses to strengthen operations and to support your long-term growth plans. They are considered investments for your business.

Cash flow statement example:

C. Cash Flow From Financing Activities

This section of the statement captures how your company raises and returns money (repays borrowed or invested funds) to fund the operational costs of your business or plans for expansion. This can include:

• Borrowing money through loans or credit lines.
• Selling shares to investors.
• Paying back loans.

Cash flow statement example:

Cash Flow Analysis: How to Read a Cash Flow Statement Like a Founder

Now that we've covered what a cash flow statement is, its components, and its importance, let's learn how to read one.

You must begin by first analysing whether your business (selling products, repeat purchases, and customer acquisition) is generating enough cash or running out of it. This would help to determine if the cash flow is positive or negative.

• Positive cash flow indicates that your D2C business is bringing in more money from product sales than it is spending on operational expenses during a specific duration.
• Negative cash flow means that your cash outflow - inventory purchases, operational costs, marketing expenses, etc. is higher than the cash inflow coming in from product sales during a specific duration.

Cash Flow vs Profit: The Most Common Founder Mistake

Positive cash flow is an ideal situation for all D2C brands. It gives you the freedom to reinvest, pay down debts, and plan for growth without constantly checking your bank balance.

However, a positive cash flow is not the same as profit.

Most founders get confused in understanding the difference between profit and cash flow, and this is often one of the reasons D2C brands stall.

Profit is calculated as the amount left after subtracting all expenses from revenue. Let us take a look at an example in INR:

• Products sold: ₹20,00,000 (revenue)
• Expenses: ₹5,00,000
• Profit = ₹15,00,000 (revenue - expenses)

This seems to be a great situation. However, this ‘profit on paper’ may not always translate into cash flow, and there could be multiple scenarios wherein the bank account may be running dry.

A lot of D2C businesses face a challenge of liquidity because of cash being tied up in:

• Procurement of inventory for future use.
• High customer acquisition costs
• Calculating ROAS without considering the RTO
• Logistical expenses.
• Payments from customers are delayed due to COD
• High RTO rate

When your cash is tied up across all these areas, that ₹15,00,000 is just a number on your balance sheet, not money in your bank account.

For this reason, cash flow is as important as profit. It helps D2C businesses have enough liquidity to smoothly carry out their operations and invest in growth.

This is where Snapmint can make a difference.

• It offers customers flexible no-cost EMI payment options, and D2C brands are able to increase their GMV and revenue.
• D2C brands are able to cater to a larger spectrum of buyers and improve their online sales.
• Brands witness a decrease in customer acquisition costs (CAC) and improvement in margins.

Snapmint offers a full upfront settlement to the brand, which means your cash flow is not affected by offering EMI to your customers.

Snapmint works with a wide range of fast-growing D2C brands such as Neemans, Nish Hair, Mokobara, Cashify, boAt, Mivi, Titan, The Sleep company - catering to various categories, from fashion, electronics to lifestyle and wellness. By partnering with Snapmint, these brands have witnessed a healthier cash flow and strong growth - driving higher conversion rate and average value order. For instance, Miniwest recorded a 21% increase in conversions, while Titan saw 20% uplift in average order values.

Key Cash Flow Metrics Every Founder Should Track

Apart from knowing how to read and understand a cash flow statement, these are some terms that every D2C founder or CEO should know:

• Burn rate means how much money a company spends or loses every month. Let’s take a look at an example.

A company’s

• Monthly expenditure is ₹25 lakhs per month.
• Its revenue is ₹10 lakhs.
• It is burning ₹15 lakhs per month.

This metric is essential for the company to gauge how quickly the cash will disappear.

• Runway means how long a business will survive at the current spending speed. This helps to plan before the business runs out of cash. Let us go back to the previous example.

Company A has:

- ₹5 crores in the bank
- Its burn rate is ₹15 Lakhs per month
- Runway = Cash in bank ÷ Monthly burn rate.
- Its runway is 33.33 months, i.e., 2 years and 9 months.

This metric is important to know how much time your company has before it has to raise funds, increase revenue, or cut costs.

• Net cash flow means total cash coming in minus the total cash going out during a period. Let us take a look at an example.

In company A’s account,

This helps to gauge whether the bank balance is growing or shrinking.

• Operating cash flow margin helps to evaluate how much real cash a business generates from sales.

It is a simple calculation: Operating cash flow ÷ Revenue.

Through this metric, you can evaluate how a business turns sales into real cash.

• Free cash flow helps to assess cash left after paying for operations and necessary investments (like equipment, inventory, etc.)
  It is calculated on the idea of Operating Cash Flow - Capital Expenditure.
  This extra available cash can then be utilised to pay off debts, make expansion plans, build reserves, etc.

• Customer acquisition vs cash recovery cycle metric is vital, especially for startups. It is an analysis of how much and how long it takes to acquire a customer and how long it takes to recover the invested amount from the customer. Let us take a look at an example,

Company A spends

How A Profitable Startup Still Runs Out Of Money

More than 28,000 startups have shut down between 2023 and 2024.

Despite looking profitable on paper, many D2C businesses shut down in India every year.

Some common pitfalls are:

• Discount killing the margins: Seeing a spike in sales only during the high discounting period. This means every sale is killing your margin, while you don’t realise it.
• High RTO: Another common challenge is high RTO (return to origin). This is more common in cases where customers opt for the COD (cash on delivery) option. Here, the brand has to pay for shipping, reverse logistics, and bear the loss of product gets damaged.
• Recording unrealised sales: These are cases where sales have been recorded, but customers have refused to take delivery of items. This is quite common when customers opt for COD. You can reduce this by increasing prepaid orders.
• High customer acquisition costs: Spending a lot on marketing campaigns ends up adding strain on cash flow.
• Overinvesting in inventory too early: Procuring three months of stock when you have two weeks of runway ties up cash that you cannot afford to block. Revenue depends on future sales, which are never guaranteed.
• Acquiring new customers every time: This can increase your CAC and affect your margins. You must focus on increasing your repeat customers and avoid scaling unless you have at least 20-30% repeat customer rate.

All these aspects put a major strain on D2C brands to manage operational costs and maintain positive cash flow.

Red Flags In A Cash Flow Statement

While reviewing a Cash Flow Statement of an accounting period, you must consider the following red flags:

• The business is profitable, but the cash flow is negative.
• Short runway (6 months or less).
• Cash flow depends heavily on investors or loans.
• Increase in receivables - customers not paying on time.

Tools & Best Practices for D2C Founders for a Positive Cash Flow

To stay cash healthy while you grow, you must:

• Review the cash flow statement weekly rather than monthly with your accounting team.
• Create a cashflow spreadsheet or dashboard to see upcoming inflows and outflows.
• Build a buffer - set aside 3 to 4 months’ worth of expenses to handle any dip in cash flow.
• If your business is witnessing lower conversions, smaller order sizes or cash flow strain, look for solutions like Snapmint that can propel your growth by increasing average order value, checkout conversion rate, GMV, and overall cash flow.

For D2C businesses, implement strategic payment tools to maximise earnings. Snapmint integration helps D2C businesses receive 100% order value upfront, even though customers pay in instalments - supporting healthier cash flow management.

By introducing pay-in-parts, your D2C company can ensure a positive cash flow, and its growth is not constrained due to delayed receivables. Moreover, Snapmint assumes 100% credit risk and integrates smoothly with the company’s existing payment architecture.

Conclusion

For maintaining a healthy D2C business, it is critical for you to understand and manage a Cash Flow Statement. You will be able to analyse how money moves in and out, know how much cash is available in your account, get to identify any red flags and the overall sustainability of your business model. By mastering cash flow, you will be in a stronger position to allocate funds, avoid cash crunches, and build a stable and scalable D2C brand.

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